Treasurer of corporation failed to remit payroll withholding taxes and sole shareholder found personally liable for the taxes not paid.
The Facts of the Case
The taxpayer was the president and sole shareholder of his company. The taxpayer retained the services of a treasurer and accountant who prepared and signed the company’s quarterly tax returns and paid over any taxes that were due to the government. However, the company failed to pay over the taxes it withheld from its employees’ wages in trust for the government.
Is Taxpayer Liable for Misdeeds of Treasurer?
A district court granted summary judgment to the government on its complaint to recover outstanding Trust Fund Recovery Penalty (TFRP) that the IRS assessed against the taxpayer. The district court found that the taxpayer was personally liable under Code Sec. 6672 because he had a duty to pay over the taxes but willfully failed to do so.
Taxpayer Argues That His Failure to Pay Payroll Taxes Was Not Willful
The taxpayer appealed to the Eleventh Court of Appeals and argued that while he was responsible for paying the taxes, he did not act “willfully”. The Court of Appeals affirmed the district court’s judgment that an individual was personally liable for trust fund recovery penalties (TFRP) under Code Sec. 6672.
At trial, the taxpayer explained that he did not know about the unpaid taxes until an IRS agent pointed it out to him, following which he corrected the problem.
Why the Taxpayer’s Conduct Was Found Willful
The court stated that even if the taxpayer reasonably relied on the accountant to prepare the company’s trust-fund taxes, he became aware of the unpaid taxes during the last tax period when an IRS agent had alerted him towards it. From that point forward, the taxpayer had a duty to use all unencumbered funds available to the company, including acquired funds, to pay those back taxes. However, the taxpayer used those acquired funds to continue running the company which required him to pay employee wages, rent for office space, utility bills, loan repayments and suppliers for materials. By paying these other creditors before paying the unpaid trust-fund taxes, with knowledge of the tax liability, the taxpayer acted “wilfully”.
Tax Tip #1
Whether a company is using an outside service provider or an internal employee to timely remit payroll tax withholdings, the IRS provides taxpayers with online access to verify that the tax withholding payments are being made. While a taxpayer can delegate others to remit the payroll tax withholdings, they cannot delegate the responsibility to others. Use the IRS services and confirm that the remittances are being made. Depending upon the dollar amount of the payroll tax withholdings, this verification should be made per payroll period, monthly or annually. The frequency of the verification is directly related to the dollar amount of the tax withholdings.
Tax Tip #2
Once a responsible person becomes aware that payroll taxes were or are not being timely deposited, immediate priority of all payments made by the company need to be made to the IRS to pay the unpaid taxes. Once those funds are diverted for any other purpose, the IRS (and the courts) deem that behavior as being willful failure to pay payroll taxes and the responsible person becomes personally liable for those taxes.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.