EMPLOYMENT TAXES
WHAT HAPPENS WHEN EMPLOYER DOESN'T PAY - ARE YOU PERSONALLY LIABLE?

To encourage prompt payment of withheld income and employment taxes, including social security and railroad retirement taxes or collected excise taxes, Congress passed a law that provides for the assessment of penalties and PERSONAL LIABILITY.

If you are a “responsible person,” the IRS can apply this penalty against you PERSONALLY and immediately. It happens after your employer does not pay the taxes that are due. Also, the IRS can apply this penalty regardless of whether you are no longer employed by the business, whether you or it is out of business or whether you or it hasn’t any assets.

Caution: Once the IRS asserts the penalty, it can take collection action against your individual assets.

Figuring the penalty amount.
The amount of the penalty is equal to the unpaid trust fund tax – So you’ll have to pay the tax and the penalty! To compute it, add:

1) The unpaid income taxes withheld, plus
2) The employee’s portion of the FICA taxes withheld.

Can You be Penalized?

The IRS may impose the penalty against any person who is responsible for collecting or paying withheld income and employment taxes AND who willfully fails to collect or pay them. Therefore, the two key elements that support this penalty assessment are responsibility and willfulness.

Who is a responsible person for a trust fund tax? A responsible person is one who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.
Therefore, responsibility involves status, duty, and authority. This person may be:
- An officer or employee of a corporation, or
- Of a partnership, or
- A corporate director of shareholder, or
- A member of a board of trustees of a nonprofit organization, or
- Another person with sufficient authority and control over funds to direct.

In some situations the responsible person may be a person who is directly affiliated with the delinquent business. For example, the penalty may be assessed against an official or employee of a bank or other financial institution who has the authority to direct the financial affairs of the business and:
-Furnishes funds to a business and directs how the funds are to be used, or
-Directs the business not to pay the taxes, or
-Uses the funds to pay other creditors.

Proof of willfulness. By willful, the IRS means conduct that is intentional, deliberate, voluntary, and knowing – as opposed to accidental conduct. You are considered to have a willful attitude if you have free will or choice and yet either intentionally disregard the law or are plainly indifferent to legal requirements. For willfulness to exist, the responsible person must:
1) Know about the unpaid taxes, and
2) Use the funds to keep the business going or allow the funds to be used to meet other creditor claims.

Willfulness does not imply that you act for personal gain. For example, the courts ruled in one case that the actions of a corporate officer, in permitting withheld taxes to be used to pay business operating expenses supports the penalty. In addition, if an employer meets payrolls, the IRS will say that sufficient funds were available to pay the tax, and assess the penalties.

So, if you’ve been labeled “RESPONSIBLE” or fear that you may be – get with us immediately.

Over the years, we have been successful avoiding that label. We’ve also proven that the IRS’s earlier determination and assessment was incorrect even in tax periods six, seven and eight years earlier. And when you consider that penalties (and interest) can add up to hundreds of thousands of dollars, it’s worth looking into.

Finally, we strongly suggest that you have us speak for you when inquiring into these matters and in making your presentations. Knowledge of the fine points of the law is a necessity. Remember, these are detailed and explosively expensive matters. Experience with these problems is fundamental to their successful resolution. We know that many taxpayers actually add to their own confusion and defeat. They are emotionally involved and do.