Under 26 U.S.C. § 7202, willful failure to collect or pay over tax is a federal felony that applies to any person responsible for collecting, truthfully accounting for, or paying over federal taxes who intentionally fails at any of those duties.126 U.S.C. § 7202 A conviction carries up to five years in prison per violation, and although the statute itself caps fines at $10,000, the general federal fine provision raises the maximum to $250,000 for an individual and $500,000 for an organization.218 U.S.C. § 3571 The statute is aimed primarily at employers who withhold payroll taxes from workers’ paychecks and then never send that money to the IRS.
What the Statute Criminalizes
Section 7202 imposes three distinct duties: collect the tax, truthfully account for it, and pay it over to the IRS. A failure of any one duty is enough to trigger criminal liability. An employer who deducts the correct amounts from paychecks but never deposits them has broken the law. So has an employer who deposits money but files returns misrepresenting what was owed.
The taxes at the center of the statute are what practitioners call trust fund taxes: the Social Security and Medicare contributions collected under FICA from the employee’s share of wages, plus federal income tax withheld from paychecks. The employer’s own share of FICA is not covered by this statute. Once the employee’s portion is deducted from a worker’s pay, the money legally belongs to the U.S. Treasury. The employer is only holding it in trust. Spending those dollars on rent, inventory, or payroll for other workers is treated with roughly the same seriousness as embezzlement.
Each tax period counts as a separate offense. A business that skipped deposits across eight quarters can face eight counts, and exposure compounds quickly when violations span years.
Who Can Be Charged as a Responsible Person
Liability doesn’t stop with the person who physically writes checks or signs returns. The IRS applies a “responsible person” test that looks at actual authority over which bills the company pays. According to the IRS Internal Revenue Manual, responsibility depends on status, duty, and authority within the organization, evaluated on the facts of each case.
The factors include whether someone could hire and fire, sign checks, decide which creditors got paid, control payroll, make federal tax deposits, or direct the company’s financial operations. Corporate officers, directors, significant shareholders, and mid-level employees with real disbursement authority can all qualify. More than one person in the same company can be held responsible for the same unpaid taxes.
What matters is what someone did with their authority, not their title. Handing off deposit tasks to a bookkeeper does not shield an officer who still decided which creditors got paid first.
What “Willfully” Means
Not every unpaid payroll tax bill leads to felony charges. The government has to prove willfulness, defined by federal courts as a voluntary, intentional violation of a known legal duty. That standard comes from the Supreme Court’s decision in Cheek v. United States and has been applied consistently across circuits.
An honest bookkeeping mistake does not qualify. Neither does carelessness, and neither does gross negligence. The IRS Tax Crimes Handbook confirms that careless disregard or gross negligence is not enough to convict. That line is where most contested cases are fought.
In practice, the most common evidence of willfulness is proof that the employer paid other creditors while knowing payroll taxes were overdue. Covering rent, suppliers, and utilities while skipping IRS deposits shows the intentional diversion that the statute punishes. The government does not need to prove fraud or malice. Knowing the obligation existed and choosing to spend the money elsewhere is enough.
Penalties on Conviction
A Section 7202 conviction is a felony. Prison exposure runs up to five years per count. The statute’s own $10,000 fine cap is overridden by 18 U.S.C. § 3571, which sets a $250,000 maximum for individuals and $500,000 for organizations for any federal felony unless the underlying statute exempts itself. Section 7202 contains no such exemption, so the higher figures apply. A convicted defendant also has to pay the costs of prosecution.
Restitution works differently here than in many federal cases. The Mandatory Victims Restitution Act does not apply to Title 26 offenses, so restitution under Section 7202 is discretionary. A court can still order it as a condition of supervised release or probation, or as part of a plea agreement. If the court declines to order restitution, it must state its reasons on the record.
None of these criminal penalties wipe out the underlying tax debt. The IRS will still pursue collection of every dollar of unpaid trust fund taxes through its civil tools, so a convicted defendant typically faces both criminal penalties and a civil tax bill.
How Section 7202 Differs From the Civil Trust Fund Recovery Penalty
Most trust fund tax cases never reach a criminal courtroom. Far more often, the IRS proceeds civilly under 26 U.S.C. § 6672, which imposes the Trust Fund Recovery Penalty. That penalty equals 100% of the unpaid trust fund taxes and is assessed personally against any responsible person who willfully failed to pay.326 U.S.C. § 6672
The civil penalty uses the same two-part test as the criminal statute: the person must be a responsible party, and the failure must be willful. But the consequences are financial, not carceral. No prison, no felony record. The IRS assesses the penalty and collects it like any other tax debt, using liens, levies, and wage garnishment.
The distinction matters because many people hear “trust fund penalty” and assume it means prosecution. In reality, the IRS reserves Section 7202 charges for the most serious cases: large dollar amounts, long time periods, or evidence of deliberate concealment. The civil penalty under Section 6672 handles the rest.
How Long the Government Has to Bring Charges
The statute of limitations for Section 7202 is not fully settled. The Department of Justice takes the position that the period is six years, relying on 26 U.S.C. § 6531(4), which sets a six-year window for willful failures to pay over tax.426 U.S.C. § 6531 At least two federal district courts have held the period is only three years. The IRS Internal Revenue Manual acknowledges the split without resolving it.
For anyone weighing potential exposure, the safer assumption is six years from the date the return was due or the tax should have been paid over, whichever is later. A three-year defense is available to argue, but relying on it is risky when the DOJ actively contends for six.
How These Cases Start
The IRS does not need a tipster to find unpaid trust fund taxes. Employers file Form 941 every quarter reporting wages paid and taxes withheld. When the reported numbers don’t match the deposits actually received, the mismatch is flagged automatically. Not filing Form 941 at all draws attention even faster, because W-2 data and prior filings already show the IRS that the business has employees.
Once a shortfall is identified, the case usually begins on the civil side. A revenue officer contacts the business, determines who qualifies as a responsible person, and assesses the Section 6672 penalty. A criminal referral under Section 7202 typically follows only when the investigation reveals willful conduct: repeated failures across multiple quarters, evidence that the employer knew the obligation and diverted funds anyway, or attempts to hide the shortfall through false filings.