Reliance on a Third Party as a Defense in Section 7202 Payroll Cases

Share this Article
Facebook Icon LinkedIn Icon Twitter Icon
Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Section 7202 of the Code makes it a felony for any person to willfully fail to collect and pay over payroll taxes to the IRS.  Put simply, a taxpayer may be subject to jail time if the government merely proves that the taxpayer:  (1) was responsible for paying over payroll taxes; and (2) willfully failed to do so.

In many cases, business owners have difficulties rebutting the government’s contention that they are responsible persons. Thus, the issue of whether the business owner was willful in his conduct becomes a crucial issue.

Late last year, the Department of Justice (DOJ) issued a press release regarding the criminal indictment of Mr. Thrush, a business owner in the State of Michigan.  According to the press release and the allegations in the indictment, Mr. Thrush failed to pay $238,223 in payroll taxes over a two year period.  Moreover, Mr. Thrush allegedly failed to file income tax returns for three years related to his business income.  That case has proceeded towards trial.  See U.S. v. Thrush, No. 1:20-cr-20365 (E.D. Mich.).

A recent order in that case shows that Mr. Thrush offered at least one defense against the government’s contention that he was willful.  More specifically, Mr. Thrush has asserted that he was not willful because he relied on an employee of one of his businesses to manage payroll returns and pay employment taxes to the IRS.  To support his claims that he discovered the unpaid payroll taxes after that employee left, Mr. Thrush sought to offer as evidence at trial his late payroll tax and income payments to the IRS and his delinquent income tax returns.  Conversely, the government sought to exclude this evidence under Rule 403 of the Federal Rules of Evidence.  The facts relevant to the court’s disposition of this issue in addition to the ruling itself are set forth below.

The Facts of U.S. v. Thrush

Mr. Thrush owned several businesses.  Because he was a business owner, Mr. Thrush was found to be the responsible person for collecting the payroll taxes at issue in the case.  The indictment alleges that although Mr. Thrush paid his employees from 2014 through 2016, he failed to make payroll taxes to the IRS.  The indictment further alleges that Mr. Thrush “directed” nearly $500,000 from his business payroll accounts to be spent on ordinary business expenses and construction costs incurred by his wife between April 2014 and October 2016.

Significantly, these latter facts asserted in the indictment suggest that Mr. Thrush may have been willful in failing to pay the payroll taxes to the IRS.  But, during the proceedings, Mr. Thrush offered another explanation for why the payroll taxes were not timely made.  According to Mr. Thrush, he relied on the business’ bookkeeper for all payroll tax matters and even his individual income tax filings.  Thus, according to Mr. Thrush, he only became aware of the unpaid payroll taxes when he hired a new bookkeeper.  To support these claims, Mr. Thrush sought to introduce as evidence in trial his delinquent tax payments and his delinquent individual income tax return filings.

On the other hand, the government sought to exclude this evidence.  According to the government, this evidence was irrelevant to Mr. Thrush’s mental state during the relevant time periods when the payroll taxes and personal tax returns were due.  Moreover, the government contended that introduction of the evidence would mislead the jury.

In response, Mr. Thrush argued that his delinquent return filings were relevant to whether he willfully failed to account for and pay over his taxes.  According to Mr. Thrush, he did not know that the taxes were delinquent until after his bookkeeper left and after he did so learn, he worked diligently to reconstruct his finances and pay his taxes.

The Court’s Ruling

Under Rule 403 of the Federal Rules of Evidence, a court may exclude evidence where “the probative value is substantially outweighed by the danger of one or more of the following:  unfair prejudice, confusing the issues, misleading the jury, undue delay, wasting time, or needlessly presenting cumulative evidence.”  Fed. R. Evid. 403.  As discussed above, the government sought to exclude Mr. Thrush’s delinquent return filings under this Rule on the basis that the introduction of such evidence would mislead the jury—i.e., such evidence was irrelevant to Mr. Thrush’s mental state during the tax periods in question.

In support, the government relied upon Sansone v. U.S., 380 U.S. 343 (1965) and U.S. v. Pang, 362 F.3d 1187 (9th Cir. 2004).  In Sansone, the defendant admitted to investigators that he knowingly understated his income in one year.   However, he argued that he should not be convicted under Section 7201 because he intended to report that same income in a subsequent year, when he would be better situated to pay the resulting tax.  The Supreme Court disagreed with the defendant that such an explanation would be a defense to a criminal conviction under Section 7201.

In Pang, the defendant was also charged with tax evasion.  Prior to trial, though, he paid the amount of taxes due and tried to offer the payments in as evidence to demonstrate his lack of willfulness.  The district court excluded the evidence, and the Ninth Circuit upheld the decision, noting that the evidence was “irrelevant”.

Notwithstanding these decisions, the federal district court noted that the Sixth Circuit had “expressed a more liberal approach to the admission of delinquent tax filings.”  For example, in Heindel v. U.S., 150 F.2d 493 (6th Cir. 1945), the government introduced evidence that the defendants in a tax evasion case had filed an amended return showing substantially greater income than previously reported.  The defendants tried to introduce evidence that the additional taxes were promptly paid but the district court excluded the evidence as irrelevant.  The Sixth Circuit, on appeal, disagreed with the district court that such evidence was irrelevant and noted that the defendants’ additional tax payments should have been admitted into evidence because they were relevant to their good faith defense.

The district court in Thrush also noted that other federal courts had held similarly.  See, e.g., U.S. v. Klotz, 792 F. Supp. 28 (M.D. Pa. 1992) (government’s motion to exclude evidence of delinquent tax filings after defendant was made aware of forthcoming criminal charges denied).

After reviewing the rationale in Heindel and Klotz, the federal court concluded:

Defendant’s version of events, if believed, would allow a reasonable jury to infer that his failure to pay taxes and file tax returns was the result of ignorance, rather than willfulness.  Accordingly, Defendant’s delinquent filings, if offered in conjunction with the assertions discussed above, would be probative of his mental state during the period in question.

In comparison, evidence of the delinquent filings poses only a modest risk of misleading the jury.  The evidence will not, and cannot, be offered to show that Defendant’s prior crimes, if any, were somehow vitiated, see Sansone, 380 U.S. at 354, and the jury will be clearly instructed as to the elements of the charged offenses and the meaning of willfulness.

Accordingly, the federal district court denied the government’s motion to exclude the evidence.


The issue of willfulness in criminal tax cases is often a hotly contested one between taxpayers and the government.  However, as the Thrush decision shows, taxpayers can raise potential defenses against the government’s burden of showing willfulness.  If the taxpayer relied upon a third party for payment or filing obligations, it may make sense for the taxpayer to attempt to remedy the non-payment and non-filings (bearing in mind that such conduct could also be viewed as admissions against the taxpayer).  In these cases, it often makes sense for taxpayers to consult criminal tax attorneys to determine the best course of action.


Criminal Tax Defense Attorneys

Freeman Law represents companies, executives, and individuals in regulatory and white-collar government investigations and prosecutions. We employ a proactive approach to defend vigorously and strategically position our clients. White-collar matters often involve parallel regulatory and civil proceedings. Freeman Law can navigate the complexities and collateral consequences of multiple proceedings. And when it comes to the court of public opinion, we employ ethical and strategic tactics to manage publicity. Schedule a consultation or call (214) 984-3000 to discuss your allegations and investigations concerns.