Responsible Person: Payroll Taxes and Accountability
Internal Revenue Code Section 6672(a) provides that “any person required to collect, truthfully account for and pay over any tax imposed by the Internal Revenue Service who wilfully fails to do so, will, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax not collected or paid over.” Under this section, the use of the term “person” allows the IRS to pierce the corporate veil and go directly against any person who is responsible for the businesses’ failure to pay over trust fund taxes, thereby making that person personally liable for the employer’s unpaid payroll taxes.
Both the Internal Revenue Service and the courts broadly define a “responsible person.” The primary factor in determining “responsible person” status is whether a person has the statutorily imposed duty to make the tax payments. Other factors may be weighed in the determination of whether or not someone is a “responsible person,” but the IRS and courts focus on the relationship the individual has with the business and considers the following:
- Do you have the ability to compel or prohibit funds to be allocated?
- Do you have authority to sign checks?
- Do you have authority to make decisions for disbursement of funds and payment of creditors?
- Are you an officer and director of the company?
- Do you have control over company’s payroll?
- Do you prepare and sign payroll tax returns?
- Do you actively participate in day-to-day management?
- Do you have the authority to hire and fire employees?
It is not uncommon in business that company owners do not want to be bothered with accounting on tax matters, or for directors to rely on an employee to take care of payroll and payroll tax matters. It is important to note however, that delegation of authority does not relieve a person of responsibility to collect and pay taxes to the government. In many court rulings, the courts have determined that the same authority that permits control carries with it a non-delegable duty to ensure that withholding taxes be collected and remitted in accordance with the law.
Trust fund penalties can be assessed against any deemed “responsible person” who fails to pay withheld taxes when sufficient funds are available but are directed to pay other obligations instead.
The threat of being fired by management for paying the taxes will not make that individual less responsible. The courts have determined that an individual is not entitled to place their own interests concerning employment over and above that of the government’s right to collect payroll taxes.
The IRS considers “wilful failure” to be the failure to remit trust fund taxes wilfully if it is a voluntary, conscious and intentional act. It is considered “wilful failure” if an individual knew of any non-payments or disregard that the payments were made.
If it can be proven that an individual failed to assess and correct the payroll tax deficiencies immediately upon learning of their existence, directed to pay other creditors first, or neglected their duty to use all available funds to pay back taxes, that individual is deemed a “responsible person” and can be held personally liable for unpaid payroll taxes. 1000% of the trust fund penalty will be assessed against them personally. Failure to pay trust fund taxes can also lead to criminal charges punishable by up to a $10,000 fine or five years in prison or both.
If you are a business owner or a person whose responsibilities makes you a “responsible person” (see items 1 – 8 above), be certain that all payroll taxes are being properly withheld and remitted in a timely manner. Many individuals who are simply employees of companies may be deemed a responsible person and not even be aware of it.
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