The COVID-19 pandemic could have multiple effects on felony employment tax charges, including on how defense attorneys argue cases for employers who failed to pay over taxes while trying to keep their businesses afloat.
According to Jay Weill of Sideman & Bancroft LLP, the economic difficulties posed by the pandemic could affect not only what charges the government brings for the 2020 tax year but also cases from earlier years that judges and juries are hearing in the midst of those difficulties.
For example, defendants in a section 7202 case could try to evoke sympathy by showing that they used the payroll taxes that they withheld but didn’t pay over to the government only to aid their struggling businesses rather than support a lavish lifestyle, Weill told Tax Notes.
A defendant could try to generate sympathy from the jury, or convince a prosecutor of reduced jury appeal, by invoking not only the difficult economic climate but also the workers supported by the active business, Weill said. The goal would be to play up the consequences of handing over the money held in trust for the government and argue that doing so could put the business’s employees out of work, he said.
An alternative could be to save the “struggling business” argument for the judge at sentencing, but that risks provoking umbrage at the idea that the defendant knows how to spend the money better than the government, according to Weill.
Sandra R. Brown of Hochman Salkin Toscher Perez PC, a former tax prosecutor, agreed. “If the money you’re using really belongs to the taxpayers, it’s easy to be charitable with someone else’s money,” she said.
Brown recalled a section 7202 case she prosecuted in which a defendant argued that he used the improperly retained trust funds for good purposes. “A number of his business competitors actually came to the sentencing and wanted to comment that they could never figure out how he always underbid them,” she said.
One way for a defense attorney to determine whether the sympathy play is advisable would be to investigate the judge and jury hearing a particular case to see whether they’d be amenable to the argument, Brown said.
Weill noted that he’s defending two cases in which the defendants used the trust funds only to prop up their businesses.
Pandemic Cases
In a few years, when the government starts prosecuting taxpayers for trust fund tax violations committed during the pandemic, it might be even tougher to convince a jury to convict a business owner who tried to keep employees in their jobs, Weill said. That’s especially true for a defendant who had perhaps been denied a Paycheck Protection Program loan, he said.
Brown said the pandemic difficulties could make jury voir dire particularly interesting if and when the government starts prosecuting business owners for employment tax crimes that occurred in 2020 and 2021. Prospective jurors could face questions about whether they or their family members contracted the virus, lost businesses or jobs, or had to work in person during the pandemic in addition to questions about use of the PPP or tax credits, she said.
“There’s going to be a cottage industry there with juror experts profiling and helping out with a lot of this,” Brown said. Some defendants might start taking cases to trial that they otherwise wouldn’t, but there also might be a lot of guilty pleas after jury seating on the first day of trial, she said.
Brown said that other questions will arise when the government moves beyond the low-hanging fruit PPP charges — like the people who invented whole businesses, listed Mickey Mouse as an employee, or bought Lamborghinis with the loan proceeds — to cases that exist in grayer areas.
For example, Brown wondered what should be done about a business owner who inflated the requested loan amount but still used all the proceeds on permissible expenses — such as an employer with 10 employees who claimed on a PPP loan application to have 20 employees, and double the payroll, and used the extra funds to keep those 10 workers paid twice as long.
Brown noted that these sorts of lies could face the same sentencing issue as the massive college cheating scandal, in which the court found that there was no loss amount. Despite the government asking for a sentence of over a year for some of the parents who bribed test proctors and university athletic officials, the court found that the bribes weren’t the loss amount, leading to sentences of between zero and six months.
The targets of Brown’s example PPP lies — banks and the Small Business Administration — aren’t directly harmed, and the sentencing guidelines don’t clearly account for taxpayers who might have missed out on the opportunity for PPP loans because of other inflated ones.
These cases will be close calls for the IRS and the Justice Department, according to Brown. The government’s criminal case selection process will involve lots of background information specific to each potential defendant as well as the potential alternative of civil enforcement measures, she said.
Too Tempting?
Former President Trump’s August 2020 executive memorandum allowing employers to pause their withholding and paying over of the employee share of payroll taxes could also cause problems for employers who took advantage, according to Guinevere M. Moore of Moore Tax Law Group LLC.
The ease with which the government proves section 7202 failure to pay over crimes and the IRS Criminal Investigation division’s interest in employment tax enforcement don’t seem like environmental factors that fit well alongside the relief contemplated in the executive memo, Moore said.
“Let’s just say that you have somebody who did take [advantage of] it, and at the same time they have a three-year history of not paying over employees’ portion [of payroll taxes]. Is that going to be the straw that breaks the camel’s back?” Moore asked.
The Trump administration initially allowed a three-month repayment period for the deferred trust fund taxes, which the IRS extended to a full year on January 19 after a legislative change.
The program seems inappropriately tempting for employers who are already bad at employment tax compliance, but not yet criminally so, Moore said. Those are taxpayers who don’t mean to steal from the government, but are honestly delusional about their ability to repay the money, she said.