Fifth Circuit Rejects Challenges to Conviction for Willful Failure to Collect and Pay Over Taxes

(Parker Tax Publishing January 2018)

The Fifth Circuit, in a case of first impression, held that a district court correctly instructed a jury that an individual was guilty under Code Sec. 7202 if he failed either to account for or pay over tax, and it rejected the individual's argument that his failure to comply with both duties had to be proven to uphold a conviction. The court also rejected the individual's claim that the trial evidence was insufficient to support convictions for willfully attempting to evade or defeat a tax under Code Sec. 7201, as well as the willful failure to account for and pay over tax under Code Sec. 7202. U.S. v. Sertich, 2018 PTC 3 (5th Cir. 2018).

Anthony Sertich was a medical doctor and plastic surgeon who owned two medical entities: South Texas Otorhinolaryngology (STO) and Advanced Artistic Facial Plastic Surgery of Texas (Advanced). Sertich paid wages to, and withheld payroll taxes from, the employees of these entities. Between 2002 and 2011, Sertich accounted for, yet failed to pay over to the IRS, approximately $2.9 million in payroll taxes.

In 2014, Sertich was charged with ten counts of violating Code Sec. 7202 by willfully failing to account for, and pay over taxes withheld from, his employees during 2008-2010. He was also charged with one count of willfully attempting to evade and defeat the payment of more than $2.9 million in taxes owed by himself and his medical entities.

At trial, the jury heard evidence that Sertich had submitted wage and tax statements to the IRS showing that money had been withheld from his employees at STO and that he had claimed credit against his personal tax liabilities for the withheld amounts. There was evidence that Sertich repeatedly failed to pay over the withheld funds. In 2004, in part because of delinquent tax liabilities, STO went out of business and Sertich moved himself and his staff to Advanced. Later that year, Sertich filed for Chapter 11 bankruptcy, causing the IRS's collection efforts to cease until Sertich again failed to make scheduled payments.

IRS officers testified about repeated attempts to contact Sertich. In 2005, the IRS attempted to contact Sertich at his home and sent a letter encouraging him to file quarterly tax returns for STO. Sertich did not reply. In November 2006, the IRS tried to visit Sertich at his business address. Additional efforts to reach Sertich failed and in late 2007, the IRS issued a levy to Sertich's bank.

In January 2008, Advanced declared bankruptcy and collection efforts were once again halted. Sertich met with the IRS and agreed to make payments pending the bankruptcy, but he failed to make the payments. The bankruptcy case was dismissed in 2009. The IRS once again took steps to collect, making multiple attempts in 2009 and 2010 to contact Sertich and collect on his tax delinquency. Sertich was notified that if he did not sell or mortgage his house, forced collection would begin. The IRS eventually issued levies on Sertich's bank accounts and insurance reimbursements. Sertich again filed bankruptcy in 2010.

Throughout the relevant time period, Sertich's accountants and others told him regularly that he was obligated to timely file and pay the taxes he owed. Sertich testified at trial that he always intended to pay his taxes but had personal and family issues and lacked the financial ability to comply. He admitted to pursuing bankruptcy filings to develop a payment plan, but stressed that he always intended to make good on his debts. Sertich said that because his accountant told him he would owe interest on his tax delinquency, he assumed the delinquency was a loan from the government.

Sertich was convicted of violating Code Sec. 7202 for willfully failing to account for and pay over the taxes he withheld from employees from 2008 -2010. He was also convicted of violating Code Sec. 7201 for willfully attempting to evade and defeat payment of payroll taxes. The district court sentenced Sertich to 41 months in prison followed by three years of supervised release. Sertich appealed his conviction to the Fifth Circuit Court of Appeals.

Under Code Sec. 7201, a person who willfully attempts to evade or defeat a tax is guilty of a felony. Code Sec. 7202 provides that any person who (1) willfully fails to collect employees' taxes or (2) willfully fails truthfully account for and pay over withheld taxes is guilty of a felony. The second offense under Code Sec. 7202 applied to Sertich. The jury was instructed that, under Code Sec. 7202, the government had to prove Sertich failed to comply with one of the two duties -- either accounting for or paying over a tax. On appeal, Sertich argued that this instruction was incorrect because the second prong of Code Sec. 7202 requires proof that a person both failed to account for and pay over taxes. Sertich also challenged the sufficiency of the evidence of his willfulness in violating Code Secs. 7201 and 7202. He claimed that his willfulness under Code Sec. 7201 was not established because he had a good faith belief that he did not violate any criminal laws, did not know it was a crime to delay his payroll tax payments, and believed he was receiving a loan from the IRS which he intended to repay with interest. He also said he did not act willfully under Code Sec. 7202 because he had a good faith belief that he was not committing a crime, and was instead receiving a loan from the IRS.

The Code Sec. 7202 jury instruction issue was one of first impression in the Fifth Circuit. Agreeing with every other circuit to have considered it, the Fifth Circuit held that Code Sec. 7202 is violated if a person willfully fails either to truthfully account for taxes or to pay them over to the IRS. The court reasoned that the text of the statute creates a dual obligation to both truthfully account for and pay over taxes, an obligation that is satisfied only by fulfilling both separate requirements. The court also pointed out that Sertich's reading would lead to an absurd result where a greater punishment would apply to one who simply failed to collect taxes than someone who collected and used the taxes for his own purpose but notified the IRS that the taxes had been collected. Further, the Fifth Circuit noted that the Supreme Court had construed Code Sec. 6672, the similarly worded civil counterpart to Code Sec. 7202, to require the dual obligation to withhold and pay the sums withheld. Finally, the Fifth Circuit looked to the title of Code Sec. 7202, "willful failure to collect or pay over tax," and found that it suggested a violation when either duty has not been met.

The Fifth Circuit also held that the trial evidence was sufficient to support findings of Sertich's willfulness under Code Sec. 7201 and Code Sec. 7202. With respect to Code Sec. 7201, the court found that Sertich had repeated interactions with the IRS regarding the taxes he owed. Sertich also repeatedly filed for bankruptcy, causing the IRS to cease its collection attempts and release levies on his bank accounts. Based on this evidence, the Fifth Circuit saw a pattern of conduct from which the jury could infer that Sertich knew he had a duty to pay his taxes but voluntarily and intentionally evaded payment. Sertich's argument that he lacked the funds to meet his tax obligations was rejected because inability to pay is not a defense and, according to the Fifth Circuit, the record reflected Sertich used withheld funds for personal use. The Fifth Circuit found that willfulness under Code Sec. 7202 was also supported by the evidence because Sertich's accountants and IRS officers repeatedly advised him of his duties under the statute. According to the Fifth Circuit, Sertich's disregard for these warnings was evidence of his willful failure to comply. It was also reasonable for the jury, the Fifth Circuit found, to disbelieve Sertich's claim that he thought he had received a loan from the IRS.

For a discussion of the elements of tax evasion, see Parker Tax ¶265,100. For a discussion of willful failure to collect and pay over tax, see Parker Tax ¶265,113.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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