California Man Ordered to Pay Over $500K in Past Due Payroll Taxes After Defaulting on Settlement Agreement
In United States v. Franklin, the owner of four construction companies apparently withheld Federal Insurance Contributions Act (“FICA”) taxes from his workers’ paychecks but failed to remit the funds to the United States Treasury. As a result, the California man was charged with one count of willfully failing to pay nearly $64,000 in federal employment taxes. After the man pleaded guilty to the criminal charge, the U.S. government filed a civil action against him in the Eastern District of California. In its complaint, the U.S. sought more than $500,000 in tax assessments and penalties related to the man’s unremitted payroll taxes.
As part of a stipulated judgment, the government agreed to accept a reduced penalty of nearly $300,000 to be paid in installments of $50,000 per month for six months. The parties’ agreement also stated the California man would be required to pay the full tax penalty plus interest if he materially defaulted. The Eastern District confirmed the settlement agreement in 2006.
Over the course of nearly two years, the man paid about $140,000 to the U.S. After losing his job in 2008, the man stopped making payments to the government and requested a modification to the parties’ settlement agreement as a result of his changed circumstances. The U.S. refused to consider the man’s request until he submitted copies of his three most recent completed federal income tax returns. According to the U.S., the returns were required in order to ensure the man was complying with his federal tax obligations. Since the man did not submit a copy of his tax returns, the government deemed his modification request to be withdrawn in 2012.
The following year, an Internal Revenue Service (“IRS”) worker purportedly discovered that the man owed an outstanding judgment to the U.S. while she was attempting to collect unrelated unpaid income taxes. After consulting with the Department of Justice (“DOJ”), the worker entered into a payment arrangement with the man. The arrangement required the man to pay $800 per month towards the outstanding judgment and $400 per month related to the man’s more recent income tax bill beginning in November 2013.
In October 2013, the U.S. filed a Rule 60(b) motion with the Eastern District of California. As part of the motion, the government asked the court to amend its prior judgment and hold the man liable for the full amount of his unpaid payroll taxes. According to the federal court, Rule 60(b) allows a district court to set aside a judgment whenever it “is appropriate to accomplish justice.” In addition, the California court said a party’s “repudiation of a settlement agreement that terminated litigation” is generally sufficient to merit relief from a court’s previous judgment. After that, the court examined the facts of the case.
The Eastern District of California first found that the man was required to make installment payments to the U.S., a payment that was more than 30 days late constituted a material default, and the man stopped making his required payments in 2008. The court then dismissed the man’s claim that the IRS employee modified the settlement agreement on behalf of the DOJ when she allowed the man to enter into a payment plan. The federal court stated the terms of the settlement required any modifications to be made in writing by the U.S. government. The court found that a standard online payment authorization form that was only signed by the man did not constitute a writing as intended in the parties’ settlement agreement. Additionally, the court said the IRS installment agreement had no impact on the man’s legal obligations to the U.S. under the terms of the settlement agreement.
Since the man failed to abide by the terms of the parties’ settlement agreement, and those terms were not later modified, the Eastern District of California held that the man repudiated the agreement and granted the U.S. government’s motion to issue an amended judgment for the full amount of the man’s unpaid payroll tax liability with a credit for any payments he already made.
Certified tax law specialist William Hartsock has over 30 years of experience advising clients in Southern California about how to successfully comply with the nation’s tax laws. To discuss your federal employment or other tax questions with a knowledgeable San Diego tax attorney, give Mr. Hartsock a call at (858) 481-4844 or contact him through his website today.
United States v. Franklin, Dist. Court, ED California 2015
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