After an employer initially fails to collect, account for, or pay employment taxes, the IRS may give issue Form 2841, Notice to Make Special Deposits of Taxes to such an employer and require deposits of future payroll tax withholdings in a special trust account for the government. Deposits into this account must be made within two days of being withheld from employees, and payments to the government must be made each month. An employer who does not strictly adhere to this may be prosecuted.
Courts have held that in order to impose criminal liability, due process requires an individual to be on notice that he or she is violating the tax code. Therefore, the notice must be hand-delivered to individual employers. However, for entities such as a corporation or partnership, if the notice is delivered to any officer or partner, all other similarly situated individuals as well as the entity are considered to be on notice.
In this situation, because notice has been given, strict criminal liability is imposed on any person who fails to withhold employment taxes from employees, deposit the funds into the special trust account, and pay the funds over to the government when they are due. Strict criminal liability means no intent or willfulness is required for prosecution of this crime. Failing to pay over employment taxes after notice has been given may lead to imprisonment of up to one year and fines of up to $5,000. The Federal Criminal Code has an alternative maximum fine provision that may impose larger fines. Moreover, each failure to comply is a separate offense.
Certain defenses may be used to avoid criminal prosecution. For instance, if an individual did not comply due to circumstances out of his or her control, no crime has been committed. However, circumstances out of one’s control do not include a lack of funds immediately after payment of wages. Additionally, lack of sales or other business difficulties typically are not considered circumstances out of one’s control. Other allowable defenses include theft, embezzlement, destruction of the business, or bank failure before a tax deposit is due.