Your Liability for Payment of Employment Taxes

The Internal Revenue Code provides that when you are required to collect or withhold any payroll related taxes from any other person and to pay over such tax to the United States, the amount of the tax shall be held in "trust" for the United States.

In order to ensure payment, the Internal Revenue Code allows the IRS to impose a Trust Fund Penalty ("TFP") sometimes known as the 100% penalty on any person required to collect, truthfully account for, and pay over any tax(i.e., witholding taxes) who fails to do so.  The 100% TFP shall be equal to the total amount of the tax evaded, or not collected, or not  accounted for and paid over. A personal Bankruptcy can not stop the collection of the TFP once imposed. 

It is the intent of the IRS to encourage the prompt payment of witheld taxes to the Government and hold individual corporate employees, corporate officers and/or  corporate board members jointly and severally liable in the event employment taxes are not paid. A person is liable for TFP if two statutory requirements are met:

1. The person is "responsible", had the duty to account for, collect, and/or pay over the trust fund taxes to the government.

2. The person "willfully" failed to collect or pay over trust fund taxes to the government.

The determination of whether the requisite responsibility exists is a question of your status within the company. This determination is considered in the context of the person's authority over a company's finances or general decision making. For example, if you had the power to sign checks or direct payment of funds you can be held liable for the TFP. You will meet the "willfully" standard if you had knowledge that the Trust Fund taxes were not being paid, yet you paid others instead. Please be aware the IRS can impose the TFP on more than one person, with all responsible persons being jointly and severally liable for the unpaid taxes. In the event a Corporation or any entity that was in business closed and failed to pay the Trust Fund Taxes, IRS can assess the TFP against former employees, Board members etc.; if they determine such individuals were responsible and wilful. However, IRS must assess the TFP 3 years from the date of the tax assessment against the Company to assess the penalty against an individual. If the IRS does not assess a TFP, during the three years, the IRS is generally barred from making the assessment against an individual. This rarely happens. In these instances, the government acts swiftly.

How can you limit your liability? First and foremost pay the taxes. If that is not an option, quit. That will limit future liability but not liability for unpaid taxes already accrued. At the first IRS contact hire a qualified tax professional. Questions you will face from the IRS Agent will be centered around your actions and knowledge(when did you know taxes were not being paid, what attempts did you make to pay the taxes etc.,)

Once, the TFP is proposed, you can invoke your appellate rights and appeal the agents findings within very specific time deadlines. If these deadlines have  passed,  and IRS starts collection action by using liens and then levies, a Collection Due Process hearing("CDP") maybe appropriate. There are also other avenues you can explore with Counsel in an attempt to soften the "TFP" finding.

If we can assist you in the resolution of  your employment tax liability issues, Please contact the firm.