Employers are responsible for collecting (withholding) and remitting their employees’ payroll taxes, which includes the employee share of Social Security, Medicare and federal income taxes. Far too many employers who experience cash flow problems make the mistake of using these payroll taxes to fund their business operations. The thought process is “We are having a temporary cash flow problem, and next month we know that our customer, ABC Company, will pay off the balance due on their account. We’ll short pay our payroll taxes this month and make it up the following month when we receive that outstanding receivable.” However, what often happens is that next month comes and goes and the expected cash flows are not there. ABC Company failed to make the promised payment or another event occurred that impacted cash flows. The significant IRS penalty and interest assessments mount up, and that short-term cash flow problem becomes a very significant IRS problem that can actually cause the business to fail.
In these types of cases, the IRS has the right to collect the trust fund payroll taxes from any of the responsible persons at the employer. In a recent court case (Pitts, CA-9, 2016-2 USTC ¶50,399), the IRS began collection efforts against a general partner (GP) of a partnership that had not paid its payroll taxes. The GP claimed that the IRS did not have this right because the IRS failed to follow its administrative collection procedures by not sending the GP a separate assessment notice. The court disagreed with the taxpayer and found that once the IRS assessed a tax against the partnership, any GPs were liable without the need for a separate assessment against them individually. The government could utilize administrative enforcement procedures under federal law to collect the debt from the GP, because the GP was secondarily liable for the partnership’s assessed debt.
If you are a general partner, officer of a corporation, have bank signature authority, or have anything to do with your company’s payroll processing or bookkeeping, or you formerly held such a responsibility, you may be personally liable for any unpaid payroll taxes of your employer or former employer. If you are concerned about this type of liability, you should consult with an experience tax professional.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
