Payroll taxes are withheld from employees’ wages by their employer, and those taxes are remitted by the employer to the various government taxing bodies. Sounds simple enough, right?
But what happens when the employer begins having cash-flow problems or other financial hardships? All too often, the payroll taxes are not remitted and the employer’s available cash is used to pay other bills.
When this happens, the IRS steps in looking for the federal withholding, FICA and Medicare taxes which were not paid. These taxes are considered to be trust fund taxes, and as such, the IRS can impose a trust fund penalty equal to the amount of the trust fund taxes not paid under IRS Code Section 6672. The trust fund penalty may apply to a person or persons the IRS decides is responsible for collecting, accounting for and paying the trust fund taxes and who acted willfully in not doing so. If the IRS can’t collect from the business, it will decide who is the responsible person and who acted willfully, and try to collect the trust fund taxes from that person or persons.
A responsible person can be an officer or employee of a corporation, a partner or employee of a partnership or a sole proprietorship, an accountant, a volunteer director/trustee, or any other person or entity who is responsible for collecting, accounting for and paying over trust fund taxes. A responsible person also may include one who signs checks for the business or otherwise has authority to cause the spending of business funds. A responsible person acts willfully if the person knows that the required actions of collecting, accounting for or paying over trust fund taxes are not taking place.
When the IRS begins an investigation as to who may be personally responsible for some portion of the tax, the notice issued to potentially responsible persons includes language that states, “We have received information that indicates you may have some responsibility for the tax. As part of the determination process, we sometimes talk with other persons when we need to obtain or verify related information. If we do contact other persons, we will generally need to provide them limited information about you, such as your name.” This mere threat of an IRS investigation frequently results in potential responsible persons pointing the finger at persons other than themselves. With each new lead provided, the IRS can expand the web of potential responsible persons.
The IRS may not always charge the correct person with the liability for trust fund taxes. If that occurs, it is up to the person charged to fight to prove that he or she is not the responsible person.
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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.