Those are your only two choices. If you opt for what's behind door number three, you may find yourself doing hard time in a federal prison. A federal appeals court has ruled that the owner of a company that couldn't deposit its taxes due to financial reasons was criminally liable for that failure. The U.S. Supreme Court affirmed the lower court's decision by turning down the owner's appeal. [U.S. v. Easterday, No. 07-10347, 9th Cir. (2009); U.S. Sup. Ct., No. 09B28 (2009).]
What's willful. Between the fourth quarter of 1998 and the fourth quarter of 2005, a company piled up $44,864,162 in undeposited. It eventually paid $25,018,869. During this time, the company continued to pay other creditors, including paying employees' salaries. The IRS levied against corporate assets and filed liens against corporate accounts to secure payment. At each turn, the owner was cooperative and took full responsibility for the delinquency, but the taxes were never paid. Eventually, the IRS filed a 109-count indictment against the owner for willfully failing to pay taxes.
The owner was convicted of 107 counts and sentenced to 30 months in prison. On appeal, he argued that he didn't willfully fail to pay, because he didn't have the money. The appeals court disagreed. Court: The government, in a willful failure to pay case, doesn't need to prove that the taxpayer had the money to pay the taxes when due, and the taxpayer cannot defend on the ground that he spent the money on other expenses. Instead, willfulness is a voluntary, intentional violation of a known legal duty, and doesn't require proof of any other motive.
High Stakes, High Risks: The appeals court admitted that a criminal prosecution for failing to deposit taxes was rare, but so were the amounts involved. This appeals court's standard of willfulness — paying other creditors before the IRS — also applies in civil suits. The IRS is willing to be reasonable if you can't pay your delinquent taxes all at once. You can negotiate an installment agreement with the IRS, but there are strings, notably remaining current in your tax deposits, filing your 941 forms, and fulfilling the IRS's requests for financial information.
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