Employers are required to withhold federal income and payroll taxes from employee wages. These taxes have to be paid to the IRS. Withheld payroll taxes are referred to as trust fund taxes, because the employer holds the money in a trust until a federal tax deposit is made for that amount. Sec. 6672(a) mentions that any person required to collect, truthfully account for, and pay over any tax imposed by the internal revenue code who fails to do so, will, in addition to to other penalties provided by the law, be liable to a penalty equal to the total amount of the tax not collected. The term any person, is critical because it allows the IRS to pierce the corporate veil, and proceed against anyone responsible for the corporation’s failure to pay trust fund taxes. It makes the person liable for the employer’s unpaid payroll taxes. As a result, the penalty can be imposed on the person, regardless of the business entity.
Both the person responsible, and the willful failure tests have to be met in order for the trust fund recovery penalty to apply. Once this penalty is assessed, the person held responsible has the burden of disproving both elements.
The Responsible Person Test
The IRS and the courts define a responsible person broadly. The main element in determining responsible person status is whether a person had a statutorily imposed duty to make the payments. Several factors indicate responsibility:
-The person has power to compel, or prohibit the allocation of funds
-Has authority to sign checks
-Has authority to make decisions to the disbursement of funds/payments of creditors
-Is an officer, or director of the corporation
-Has control over the company’s payroll
-Prepares and signs payroll tax returns
-Participates in day to day management
-Hires and fires employees
The list above isn’t exhaustive, but a good start to understand the fact the IRS looks at the person’s status, duty, and authority, to determine whether a person is responsible for paying over withholding taxes to the US. The IRS Policy Statement 5-14(Internal Revenue Manual §126.96.36.199.3), states that individuals who are non-owner employees performing ministerial acts without exercising independant judgement will not be held responsible.
Often, company officers don’t want to deal with accounting or tax matters. It’s not uncommon for a director to instruct an employee to take care of paying payroll taxes. If the employee fails, then officer should be worried. Delegation of authority doesn’t relieve a person of being accountable/responsible to collect/pay taxes to the IRS. The courts have ruled that the authority that permits controls, carries a duty to ensure that withholding of taxes is being properly done and paid to the government(Purcell, 1 F.3d 932 (9th Cir. 1993)).
The trust fund recovery penalty can be assessed against a corporate officer who fails to pay withheld taxes at the direction of a supervisor if the funds are available. The threat of being fired by a supervisor for paying taxes will not make the person less responsible for paying the taxes owed. Courts have ruled that officers aren’t allowed to do what allows them to keep employment over that of paying the government. A former president of a corporation can be considered responsible if he/she continues to retain authority to sign checks, and negotiate with the IRS, or owns stock in the corporation, or manages day to day business operations, or make decisions regarding the disbursement of money/payment to creditors.
What is willful failure
In terms of Sec. 6672, a failure to remit tax funds is considered willful, if it’s conscious, intentional, as opposed to accidental. Courts have decided that willfulness is true if a taxpayer knew of the nonpayment, or disregarded whether payments were being made or not.
How bad can it get
The IRS is very aggressive in assessing a trust fund penalty. Payroll taxes are the government’s money. The government believes those who don’t pay, are taking it’s money. The government will be relentless in its effort. With numerous employees, unpaid trust fund taxes pile up quickly. This penalty isn’t dischargeable in bankruptcy. Failing to pay trust fund taxes can lead to criminal charges. Under Sec. 7202, willful failure to pay or collect taxes is a felony punishable by up to a $10,000 fine or 5 years in prison. The IRS reservers criminal charges for the worst of cases, where a responsible person owned the business and diverted the money for personal use.
Anyone responsible under Sec. 6672, can be liable under Sec. 7207. This can apply to corporate officers, employees, and anyone responsible for collecting and paying taxes. The IRS generally targets owners who used funds for their own benefit. Courts have held Sec. 7202 creates three obligations – a person must collect, account for, and pay the taxes. If the person doesn’t do these 3 things, then he/she is in violation.
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