Injunctions as a Tool to Prevent Pyramiding of Employment Taxes

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Christine and I just returned from the ABA Tax Section May meeting.  In this brief post I want to flag an issue that DOJ attorney Noreene Stehlik and Chaya Kundra discussed at an Employment Tax panel entitled “Employment Tax Liabilities and IRS Collections” as well as a case that the Civil and Criminal Tax Penalties committee flagged. In the employment tax panel, the panelists discussed the various tools that DOJ and IRS have to go after employers who pyramid employment tax liabilities by withholding taxes from employees but then failing to remit the taxes to the government.

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Section 6672 allows the government to pierce the corporate veil and creates personal liability for delinquent employment taxes. Keith has written extensively about Section 6672 (see here). The ability to go after people in their individual capacity is powerful. Yet IRS and DOJ have been proactive in using even harsher tools to combat repeat offenders. That has included an uptick in criminal prosecutions and using injunction suits against the employer, owners or principal officers of delinquent employers.

In the last few years there have been a handful of employment tax injunction cases that have led to orders discussing the practice and power that the government has to use injunction as a remedy in this context. The statutory hook is Section 7402(a), which authorizes district courts to take a number of measures related to the enforcement of the internal revenue laws, including enjoining taxpayers from taking future conduct or requiring that taxpayers do specific acts.

While courts have long had this power, and IRS and DOJ have used it over the years, its use is growing. Last fall Keith drafted a new subchapter in Saltzman and Book Chapter 14A discussing the issue.  There are no statutory guidelines or time limitations for a civil injunction. The terms could last indefinitely, and the relief requested could be narrowly tailored or rather broad.

The new subchapter discusses the differing approaches district courts have taken, with some courts requiring  the government prove that it meets traditional standards for equitable relief, and other courts not starting the analysis from traditional equitable factors but considering whether the relief is appropriate for the enforcement of the laws in light of the statutory language in Section 7402(a).

Also at the meeting last week the Civil and Criminal Penalties Committee panel discussed a court order from earlier this year that did not grant injunctive relief in connection with multiple years of employment tax noncompliance. In US v Askins and Miller Orthopaedics, the Middle District of Florida denied the government’s request for injunctive relief (as an aside there seem to be a lot of doctor and dentist cases involving employment taxes); the request for injunctive relief was both broad (stating that the key individuals would be responsible for filing and paying on time) and specific (for example, detailing payment schedules and permitted ways for payroll processing companies to be involved to assist in meeting obligations). For over eight years the government had made numerous attempts to bring the practice into employment tax compliance. The order discusses the futility of levies, the apparent diversion of funds to an account that funded a private hunting club and allegations of a failure to disclose all bank accounts. Noting that the  collection efforts failed, the district court still did not grant the relief requested. In finding against the government, the court looked to traditional standards that would justify equitable relief, i.e., the government had to show absence of an alternate adequate remedy and the likelihood of suffering irreparable injury of denied relief.  That, in the courts view, cut against the injunction, as the government was bringing its traditional collection case for a money judgment for the unpaid taxes.

While the court sympathized with the government’s challenges in the past and its argument that it would have a difficult time collecting, that was not enough, as the order leaned heavily on the government’s ability to fashion a remedy in line with other creditors’ rights:

Bringing an action to recover money damages `does not entitle the claimant to equitable relief simply because the complaint alleges uncertainty of collectibility of a judgment if a fund of money is permitted to be disbursed. The test of the inadequacy of a remedy at law is whether a judgment could be obtained, not whether, once obtained it will be collectible.’ (citation omitted).

Conclusion

As we discuss in Saltzman and Book, even when courts do not rely on a traditional approach under equity to determine when an injunction is warranted, the government’s power is not unlimited.  I am sympathetic with the government in these cases, especially when there are pyramiding liabilities and repeated unsuccessful attempts to encourage voluntary compliance and efforts to defeat collection. Employment tax noncompliance is a major systemic problem, and the threat of contempt seems proportionate in light of repeat offenders who are tempted to view employment tax funds as a source to keep businesses afloat and who take affirmative steps to defeat collection.

We all suffer when employment taxes pile up, and it seems that this stubborn problem is need of more robust powers that are short of criminal prosecution but have more teeth than traditional collection suits.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Les, I wasn’t able to attend this panel. Like you, I’m very sympathetic to the government’s attempts to collect the taxes due and prevent the evasion of the obligation to withhold and pay over the appropriate amount of employment taxes. I hesitate to express a view without knowing all the relevant facts, but this case seems to present a fact pattern that would justify a criminal prosecution. This requires a significant commitment of resources by the Government. But it seems as though the District Court was – de facto – encouraging criminal prosecution.
    Ron

  2. Les:

    Your post raised some questions that have been kicking around in my mind for a while. Assuming these cases involve truly bad actors, why is injunctive relief necessary? Is it not enough for IRS Collections to padlock the businesses that are delinquent and bring suit under Section 6672 against the people who run those businesses? The Service has been doing both forever and I don’t understand why that is not sufficient. How is it that the bad guys continue to operate in these situations if IRS is using those well established tools?

    Just curious

  3. Bob Kamman says:

    Mothers, don’t let your babies grow up to be lawyers because they might be appointed to the District Court bench and a lifetime sentence of helping IRS collect taxes.

    The Florida judge, James D. Whittemore, is on senior status and his vacancy has not been filled. Why would IRS and the Justice Department think the best way to collect employment taxes from a surgical practice is with a court order requiring compliance? Is it because other methods would risk a public relations disaster? (Speaking of public relations, does anyone else remember the 1975 half-hour IRS film about audit procedures, starring actor James Whitmore?)

    Surgeons generally do not collect cash from patients. They receive checks from insurance companies. If those funds can’t be reached with a levy, and there are payroll-tax problems with other medical professionals, then IRS needs to lobby Congress for better enforcement tools – not the already-burdened judiciary for wrist-slapping help.

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