by Brian Mahany
In this economy, many of us struggle to meet day to day obligations. Just look at the national statistics and one realizes that tens of millions of homeowners can’t even make their mortgage payments. Small businesses are especially hurting as they struggle to keep doors open and make payroll. A recent federal appeals case affirmed that not turning over trust fund taxes is a felony, even if you simply don’t have the money.
For those who don’t know what a trust fund tax is, think of sales taxes and withholding taxes. These are taxes collected from a third party and held in trust. When you purchase an item for $1.00 in a state with a 5% sales tax, the shopkeeper will typically collect $1.05. The nickel is collected from a third party (you) and held in trust for the state. The same thing is true for withholding taxes.
Unfortunately, many small employers never really “collect” the withholding tax. They hope cash flow will improve and will have the money by the time the return is due. Trial courts have routinely determined that not having the money is not a legal defense for failing to pay withholding taxes. Recently a federal appeals court reaffirmed that principal.
In a recent 6th Circuit Court of Appeals decision (US v Richard Blanchard decided August 30th, 2011), the court upheld a 22 month prison sentence for a construction company owner who failed to turn over withholding taxes for several years before being caught in an audit. A jury convicted Blanchard of not paying withholding taxes and Blanchard appealed.
The court of appeals decided that not having money is not a defense (of course it didn’t help that the Blanchards had leased two Cadillacs during the same time that taxes were not paid). Although the government has to prove that a taxpayer acted willfully, the mere fact that the money is gone when taxes are due is alone not enough to avoid criminal conviction and prison.
Failing to pay withholding or sales taxes is a very slippery slope that will lead to prison. We know many restaurant owners and contractors who genuinely believe that they can catch up if they get one more big job or have a good tourist season. Unfortunately, interest and penalties quickly mount and these same taxpayers usually fall further behind.
Not paying trust fund taxes is a high priority with both the IRS and state revenue agencies. These audits often lead to criminal prosecutions.
If you find yourself falling behind with taxes, receive an audit notice or get that knock on the door by criminal special agents, contact an experienced tax lawyer immediately. The tax attorneys at Mahany & Ertl have decades of experience – we are ready to help! For a confidential consultation, contact attorney Brian Mahany at (414) 704-6731 or by email at
Mahany & Ertl, LLC – America’s Tax Lawyers. Offices in Milwaukee, Detroit, Portland and San Francisco. Services nationwide.