Employment & Payroll Tax Fraud Defense: 26 U.S.C. § 7202 Explained

By Elizabeth Franklin-Best, Esq., and Christopher Zoukis, JD, MBA

Payroll tax problems are common in struggling businesses — but when the IRS believes withheld taxes were diverted on purpose, an ordinary cash-flow crisis becomes a federal felony investigation. Owners, officers, and managers under scrutiny for unpaid payroll taxes should get a payroll tax fraud lawyer involved while the matter is still on the civil side, because a § 7202 case turns on willfulness and on who truly controlled the money — questions your earliest statements will answer for the government if you let them. Elizabeth Franklin-Best, P.C. defends individuals and businesses in federal criminal tax matters nationwide, employment tax cases among them.

Willful failure to collect, account for, and pay over employment taxes is codified at 26 U.S.C. § 7202, and it is a felony. These cases are document-intensive and personal: the government looks past the business entity to the individuals it believes were responsible, and it pairs the criminal charge with a steep civil penalty assessed against those same people.

What we bring to these cases is methodical, records-driven defense work. Elizabeth Franklin-Best, the firm’s principal attorney, appears in the 2026 Best Lawyers in America list as a “Best Lawyer” in Appellate Practice, and Chambers USA’s 2026 rankings include the firm for Litigation: White-Collar Crime & Government Investigations. In an employment tax engagement, we reconstruct the company’s finances quarter by quarter — who signed checks, who chose which creditors got paid, what the client actually knew about each shortfall — and test whether the government can prove willful diversion rather than a business drowning honestly. That work draws on real depth: Elizabeth Franklin-Best has appeared in more than 330 federal trial and appellate proceedings over her career, including in excess of 100 federal appeals, and she brings a sentencing-and-appellate mindset to a payroll tax case from the first interview forward. If a payroll tax problem is hardening into an investigation, schedule a paid, one-hour initial consultation with us.

Employment & Payroll Tax Fraud: Quick Answer

Question	Answer
What is employment tax fraud?	The willful failure to collect, truthfully account for, or pay over employment taxes withheld from employees’ wages — a felony under 26 U.S.C. § 7202.
What must the government prove?	Three elements: a duty to collect, account for, and pay over a tax; a failure to do so; and willfulness.
What penalties can apply?	Up to 5 years in federal prison per count and a fine, plus the costs of prosecution — and a separate 100% civil Trust Fund Recovery Penalty.
Can I be personally liable for a company’s payroll taxes?	Yes. A “responsible person” who willfully fails to pay over trust fund taxes can be personally liable civilly and, in serious cases, charged criminally.
What is the first step with our firm?	A paid, one-hour initial consultation in which we map your responsible-person exposure across the charged quarters and coordinate the criminal and civil tracks from the start.

Key Takeaways

• Willful failure to pay over employment taxes is a felony under 26 U.S.C. § 7202, carrying up to 5 years per count.
• Withheld income, Social Security, and Medicare taxes are “trust fund taxes” — held in trust for the United States.
• The government must prove a duty to collect and pay over the tax, a failure to do so, and willfulness.
• The criminal statute is paired with a civil 100% penalty — the Trust Fund Recovery Penalty under 26 U.S.C. § 6672.
• Both reach the individual “responsible person,” not just the business entity — owners, officers, and managers can be personally exposed.
• A “responsible person” is anyone with the duty and authority to collect, account for, and pay over the taxes.
• Using withheld funds to keep a struggling business alive is a frequent fact pattern — and a difficult one, because financial hardship is generally not a defense to the duty to pay over.
• Willfulness, and who truly controlled the money, are the central questions in these cases.

What Is Employment Tax Fraud?

Employment tax fraud is the willful failure to handle payroll taxes as the law requires. Employers must withhold federal income tax, along with the employee’s share of Social Security and Medicare taxes, from every paycheck, and they must pay those withheld amounts over to the IRS on the required schedule. When that does not happen, and the government believes the failure was willful, the matter can be charged criminally under 26 U.S.C. § 7202.

The withheld amounts are known as trust fund taxes. The phrase is precise: the law treats withheld payroll taxes as a special fund held in trust for the United States. The money is not the employer’s — it belongs to the government, and to the employees on whose behalf it was withheld. The IRS credits employees for the amounts withheld from their wages even if the employer never pays them over, which is why the government treats the diversion of trust fund taxes so seriously.

Employment tax cases often arise from a familiar and sympathetic situation: a business in financial distress, an owner trying to make payroll and keep the doors open, and withheld taxes used to pay vendors, rent, or wages instead of being remitted. That context matters — but it does not, by itself, make the conduct lawful. The line between a civil payroll tax debt and a criminal employment tax case is willfulness, and that line is where the defense is built.

The Three Elements of a § 7202 Charge

To convict under § 7202, the government must prove three elements beyond a reasonable doubt: that the defendant had a duty to collect, account for, and pay over a tax; that the defendant failed to collect, truthfully account for, or pay over the tax; and that the defendant acted willfully.

A Duty to Collect and Pay Over

The government must prove the defendant was a person required to collect, account for, and pay over the tax. This is the “responsible person” question, and it is often the most contested element. A duty does not attach automatically to everyone with a title — it depends on actual authority and responsibility over the company’s finances and tax obligations.

A Failure to Act

The government must prove a failure to collect, truthfully account for, or pay over the tax. Most criminal cases focus on the failure to pay over — the trust fund money was withheld but not remitted to the IRS. Whether the failure occurred, and for which tax periods, is established through the payroll records and the company’s filings.

Willfulness

The government must prove the defendant acted willfully — the voluntary, intentional violation of a known legal duty, the standard the Supreme Court fixed for criminal tax cases in United States v. Pomponio, 429 U.S. 10 (1976), and refined in Cheek v. United States, 498 U.S. 192 (1991). In employment tax cases, willfulness usually means a knowing decision to use the trust fund money for something other than the IRS. The Sixth Circuit held in United States v. Blanchard, 618 F.3d 562 (6th Cir. 2010), that the government need not prove the defendant had sufficient funds to pay — but evidence of ability to pay, discretionary spending, and the defendant’s subjective belief about the company’s finances all bear on willfulness, as do good-faith misunderstandings and reasonable reliance on the people actually handling payroll.

Applied Insight: The “responsible person” element is frequently where these cases are won or narrowed. In a company with several owners, officers, and a bookkeeper or outside payroll service, responsibility for the tax decisions is rarely shared equally. Documenting who actually decided which bills got paid — and who did not — can move a client outside the statute’s reach.

The “Responsible Person” Question

Both the criminal statute and its civil counterpart reach individuals, not just the business entity. The key concept is the “responsible person” — anyone who had the duty and the authority to collect, account for, and pay over the withheld taxes.

Responsibility is a question of fact, decided by looking at a person’s actual role rather than a title alone. Courts and the IRS consider factors such as who could sign checks, who controlled the company’s finances, who decided which creditors were paid, who hired and fired employees, who had authority over the bank accounts, and who prepared or signed the tax filings. More than one person within a company can be a responsible person at the same time, and a person can become responsible — or cease to be — as roles change.

This focus on individuals is what makes employment tax cases so personal. An owner who delegated the books, a passive investor with a title but no financial authority, a manager who followed instructions from above, or an officer who left the company before the unpaid quarters can each have a genuine argument that they were not a responsible person — or were not responsible for the periods charged.

The Criminal Charge and the Trust Fund Recovery Penalty

Employment tax exposure usually travels on two tracks at once. The criminal track is the felony under § 7202. The civil track is the Trust Fund Recovery Penalty under 26 U.S.C. § 6672 — a penalty equal to 100% of the unpaid trust fund taxes, assessed personally against each responsible person who willfully failed to pay them over.

The two provisions use parallel language and parallel concepts — a responsible person and willfulness — but they are different proceedings with different consequences and different burdens of proof. Many employment tax matters involve only the civil penalty. The criminal charge is generally reserved for cases the government views as more serious, such as long-running diversion, the use of trust fund money for personal benefit, or the layering of new entities to escape old liabilities.

The Supreme Court drew one important boundary in Slodov v. United States, 436 U.S. 238 (1978). A person who takes control of a business after trust fund taxes have already accrued — and after prior management has dissipated the withheld money — is not liable under § 6672 for using the company’s after-acquired revenues to keep operating rather than to pay the old tax debt, because the trust attaches to the withheld funds, not to everything the business later earns. Slodov also confirms that § 6672 imposes no duty to reach into personal funds or liquidate the company to cover the shortfall. For buyers, turnaround managers, and successor officers who inherited someone else’s payroll tax problem, that timing analysis can be the whole case.

Because the two tracks share concepts and evidence, they must be defended together. A statement or position taken to address the civil penalty can affect the criminal exposure, and the reverse is also true. A defense that handles only one track in isolation can leave the client exposed on the other.

Applied Insight: One of the hardest features of these cases is that financial hardship — the very reason many employers fall behind — is generally not a defense to the duty to pay over trust fund taxes. Using withheld money to keep a business alive does not excuse the failure to remit it. That reality makes the willfulness framing, the responsible-person analysis, and the timing of each quarter all the more important.

Penalties for Employment Tax Fraud

Willful failure to pay over employment taxes under § 7202 is a felony. Each count carries a statutory maximum of up to 5 years in federal prison and a fine, along with the costs of prosecution. Because employment taxes are reported quarterly, the government can charge multiple counts spanning multiple quarters, so aggregate exposure can be significant.

Alongside the criminal penalties, a responsible person faces the civil Trust Fund Recovery Penalty equal to 100% of the unpaid trust fund taxes — a personal liability that survives the business and is not dischargeable in bankruptcy. The underlying employment tax liability, interest, and other civil penalties also remain owed.

In federal court, the advisory United States Sentencing Guidelines drive the actual sentence, and the central factor is the tax loss — here, the amount of trust fund tax not paid over. The tax loss is contestable: the periods properly attributed to a particular defendant, the responsible-person analysis for each quarter, and the treatment of payments and credits all affect it. A careful tax loss analysis is an essential part of any sentencing defense.

Defenses to Employment Tax Fraud Charges

No two employment tax cases are alike, and no lawyer can promise a result. But several defense themes recur, and matching them to the evidence is the core of building a strategy:

• Not a responsible person. The defendant lacked the actual authority and duty over the company’s finances and tax obligations to be a responsible person.
• Not responsible for the charged periods. The defendant’s authority began after, or ended before, the quarters the government has charged.
• Lack of willfulness. The failure resulted from a genuine misunderstanding, a good-faith belief the taxes were being handled, or reasonable reliance on a bookkeeper, accountant, or payroll service.
• Reliance on others. The defendant reasonably believed another person or an outside service was collecting and remitting the taxes.
• No knowledge of the shortfall. The defendant did not know that trust fund taxes were going unpaid.
• Disputed responsibility among multiple actors. Other individuals controlled the decisions about which obligations were paid.
• Tax loss and sentencing challenges. Even where conviction is likely, contesting the periods and amounts attributed to the defendant can substantially reduce exposure.
• Statute of limitations and procedural defenses. In Blanchard, the Sixth Circuit held that § 7202 offenses fall under the six-year limitations period of 26 U.S.C. § 6531(4); timing and charging defects can narrow or end a case.

The right combination depends entirely on the facts and the records. Our role is to test the government’s proof element by element, develop the favorable record, and press every legitimate defense — during the investigation, in pretrial motions, at trial, and on appeal.

How Employment Tax Investigations Begin

Employment tax matters usually begin on the civil side. The IRS sees that payroll tax returns were filed without full payment, or were not filed at all, and a revenue officer is assigned to collect. The matter can escalate to a Trust Fund Recovery Penalty investigation, and from there — in cases the government views as serious — to a criminal referral to IRS Criminal Investigation.

The signals that a matter has turned criminal include a revenue officer who suddenly disengages, a request to interview owners and officers directly, or the appearance of an IRS Criminal Investigation special agent. At that point, the early steps matter. You are not required to give an unprepared interview, and because willfulness and responsibility are proven largely through a person’s own statements, an off-the-cuff explanation of “how we handled payroll” can be damaging. Preserve all records, decline an unprepared interview, and consult an experienced payroll tax fraud lawyer before saying anything substantive.

What Changed in Employment Tax Enforcement (2023–2026)

Employment tax has been a stated priority of the Justice Department’s Tax Division for years, and since 2023 the pressure has only increased. Prosecutors describe trust-fund diversion as theft from employees, and the cases they select for § 7202 charges share recognizable markers: shortfalls spanning many quarters, owners drawing healthy compensation while the IRS went unpaid, pyramiding — running up payroll tax debt in one entity, folding it, and starting another — and false statements to revenue officers during collection.

The Employee Retention Credit aftermath has added an entirely new front. The ERC is claimed on federal employment tax returns, which puts inflated or fabricated claims squarely in payroll-tax territory. The IRS has warned that anyone who incorrectly claimed the credit must repay it, with penalties and interest, and it has trained both audit and criminal resources on the promoter mills that mass-marketed eligibility to businesses that never qualified. Business owners who signed amended employment tax returns on a promoter’s assurances now face a familiar criminal tax question — what did the signer actually believe? — and the answer, documented early, can keep an ERC problem civil.

Payroll-provider failures round out the picture. When a third-party payroll service collects a client’s tax deposits and fails to remit them — through insolvency or outright embezzlement — the IRS’s published position is blunt: the employer generally remains responsible for the taxes, with a narrow statutory exception for customers of certified professional employer organizations. The civil debt survives, in other words, even when the employer was the victim. The criminal exposure is another matter: an employer who reasonably believed a provider was depositing the taxes has a powerful answer to willfulness, which is why documenting that reliance — contracts, confirmations, statements — matters so much in these cases.

Why Work With Elizabeth Franklin-Best, P.C.

Employment tax cases are personal, document-intensive, and fought on two tracks at once. They reward defense lawyers who understand the responsible-person analysis from the inside, who can work the payroll records quarter by quarter, and who coordinate the criminal and civil exposure together.

The defense is led by Elizabeth Franklin-Best — principal attorney, author of Reversing Your Criminal Conviction, and admitted before the U.S. Supreme Court, all twelve federal circuit courts of appeals, and several district courts, with pro hac vice admission available anywhere a payroll tax case is venued. Her 2026 honors include a Best Lawyers in America “Best Lawyer” listing in Appellate Practice, and Chambers USA ranks the firm for Litigation: White-Collar Crime & Government Investigations in 2026. Managing Director Christopher Zoukis works the sentencing and Bureau of Prisons dimensions of every matter from the outset. We represent owners, officers, bookkeepers, and managers at each stage of an employment tax case. The firm’s footprint is genuinely national: admitted in all twelve federal circuits and before the Supreme Court, it has carried cases through more than 190 district-court matters and over 120 appellate proceedings, the kind of two-track depth a payroll tax defense fought on parallel criminal and civil fronts demands.

You will not hear guaranteed results from us — in a willfulness case, no honest lawyer offers them. You will get a quarter-by-quarter reconstruction of the payroll record, a clear-eyed reading of your responsible-person exposure on both the criminal and civil tracks, and a coordinated strategy that never lets one track sabotage the other. To begin that work, schedule a paid, one-hour initial consultation.

Talk With a Payroll Tax Fraud Defense Lawyer

Unpaid payroll taxes do not stay a business problem — they become a personal one, attaching a 100% penalty to you individually and, in willful cases, a felony charge on top of it. Talking with a payroll tax fraud lawyer before the revenue officer’s next visit costs you one hour; talking to the government unprepared can cost far more. Book your paid, one-hour initial consultation with our team today.