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Do employers have an “affirmative” requirement to pay taxes?

The Internal Revenue Code is a large, confusing beast. Employers are subject to a number of requirements when it comes to paying taxes on behalf of their employees. One specific question recently posed in court: are employers required to take “affirmative action” to both account for and pay withheld taxes to the government?

The case involved a medical professional that owned a private practice that allegedly withheld Internal Revenue Service (IRS) payroll taxes but failed to remit the taxes to the government. As a result, the government charged the business owner with ten counts of a failure to remit IRS payroll taxes.

What happened in this case? This case serves as a lesson on the harsh penalties that can come with a conviction for tax crimes. A jury convicted the medical professional on all counts. The court sentenced the business owner to almost three years in prison along with a required $2.9 million restitution payment.

The professional appealed the holding, stating the court erroneously applied the tax code. He argued the section of the law used to result in the conviction required he fail to collect and fail to remit the taxes. He states the court erred when it instructed the jury that he was guilty if he “failed to comply with one of the two duties.”  He argued a violation occurs when both elements are not met. He argued if the court’s interpretation was correct, the law would use the word “or” as opposed to “and.”

Ultimately the appellate court stated the law imposes a mandatory obligation for employers to affirmatively fulfill both elements listed above.

What does this mean for Minnesota business owners? The federal tax code applies to all business owners, regardless of the state of operation. This case shows what can happen if a business owner fails to properly collect and remit payroll tax obligations. Any business owner that is the subject of an investigation or charged with similar crimes is wise to take action to build a defense. An attorney experienced in business tax law matters can help.

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