Who is liable for unpaid payroll taxes

Several factors indicate responsibility, including whether the person 1 has power to compel or prohibit the allocation of funds Godfrey , F. Although the above list is not exhaustive, the status, duty, and authority of an employee principally determine whether the person is responsible under Sec.

Often, company officers do not want to be bothered with accounting or tax matters. It is not uncommon for a director or chairman to instruct an employee to take care of paying payroll taxes. If that employee fails to pay payroll taxes, the officer should be worried.

Delegation of authority does not relieve a person of responsibility to collect and pay taxes to the IRS. Courts have consistently held that the authority that permits control carries with it a nondelegable duty to ensure that withholding taxes are duly collected and paid over to the government Purcell , 1 F. The trust fund recovery penalty can also be assessed against a corporate officer who fails to pay over withheld taxes at the direction of a supervisor when sufficient funds are available.

Sometimes an officer who is aware of the delinquent taxes does not pay out of fear of getting fired for disregarding instructions not to pay. The threat of being fired by a supervisor for paying the taxes will not make the person less responsible for paying the amounts owed Howard , F.

Courts have held that an officer is not entitled to prefer his own interest in continued employment over that of the government Brounstein , F.

A former president of a corporation can also be considered a responsible person under Sec. For purposes of Sec. Courts have held that willfulness is present if a taxpayer knew of the nonpayment or recklessly disregarded whether the payments were being made. This can be established by showing that the responsible person failed to assess and remedy the payroll tax deficiencies immediately upon learning of their existence, directed the corporation to pay other creditors thereby preferring other creditors over the IRS , or neglected his or her duty to use all current and future unencumbered funds available to the corporation to pay those back taxes Erwin , No.

It is important for taxpayers to understand that the IRS is aggressive in assessing the trust fund penalty. The government does not take this lightly and will not relent in its efforts to collect the amounts it is owed. For a business with numerous employees, unpaid trust fund taxes add up quickly, and the trust fund penalty consequently assessed against a responsible person can be huge. In addition, the penalty is not dischargeable in bankruptcy.

Even worse, failing to pay trust fund taxes can lead to criminal charges. Under Sec. However, the IRS reserves criminal charges for the most egregious cases, usually where the responsible person owned the business and diverted the money for his or her own personal use, rather than situations where an owner or other responsible person in a business that was facing hard times used the money to pay other creditors in a misguided attempt to keep the business afloat.

As the cases discussed below show, in a successful criminal trust fund prosecution, the responsible person is usually sentenced to prison time and required to pay restitution. A person who is a responsible person under Sec. Thus, Sec. As noted above, however, the IRS generally targets business owners who have used funds for their own benefit that they should have used to pay employment taxes.

Do yourself a favor and start by consulting a tax attorney or tax professional that handles payroll or employment taxes. A tax attorney or tax professional can help you with payroll tax problems by providing real solutions that may include:.

Trust fund taxes are not dischargeable in Chapter 7 Bankruptcy filings, no matter how long ago the taxes were assessed. This notice requires future payroll tax withholdings to be deposited into a separate trust account for the government, and the deposits must be made within two days of being withheld from the employees. An LLC or corporation that does not strictly adhere to this notice may be criminally prosecuted. Certain defenses can be used to avoid prosecution.

For example, if an individual did not comply due to circumstances out of their control, such as the total destruction of the business, theft of money, a burglary of the business, or a bank failure before a tax deposit is due.

But, please note that these defenses are not common and can be difficult to fall within. An experienced payroll tax attorney or tax professional can assist you in so many ways.

For instance, we can negotiate a settlement, offer in compromise or installment agreement with the IRS or EDD and appeal your tax matter up the chain of command at these agencies. More importantly, our team may be able to prevent the IRS or EDD from holding you personally responsible for these debts. The IRS will look first at individuals who have check-signing authority.

To determine responsible-person status, the IRS also may consider whether the individual:. In certain circumstances, outside parties — such as lenders, attorneys and accountants — can also be responsible persons. For example, a tax attorney who actively participated in managing the finances of several corporations in which he had invested was found to be a responsible person. Situations involving outsiders are the exception, not the norm. Although the company apparently had sufficient funds to pay the taxes, no payments were made.

The factors that led to that determination: He secured loans for the center, directed its tax payments and reviewed its financial reports.