Did you know that by being involved with a business that has employees, you could be held personally liable if the employment taxes are not paid?  While the payment of employment taxes is automatically the responsibility of employers operating as sole-proprietors and collectible from the individual owners, the unpaid employment taxes of businesses operating as corporations are the responsibility of the corporation.  If the corporation neglects to pay, the Internal Revenue Service has a powerful tool at its disposal, the capability to hold individuals liable for a portion of the unpaid employment taxes of a corporation and to collect from the personal assets of those responsible individuals.

In order to encourage the timely payment of withheld income and employment taxes, Internal Revenue Code Section 6672 created a penalty known as the “Trust Fund Recovery Penalty”.  The Internal Revenue Code considers withheld taxes (income, social security, certain excise taxes and railroad retirement taxes) to be “trust fund” taxes as these funds are held in trust for employees until they are paid in to the government by an employer. 

If a corporation fails to timely pay trust funds to the government, IRC Section 6672 authorizes the IRS to conduct an investigation to determine whether an individual or individuals might be held personally responsible for the non-payment.  This investigation will involve interviews with anyone that may have been in a position to know who held the authority to direct payments and anyone with direct knowledge of the decision-making process of the business.  The goal of these interviews is to determine who may have known of the non-payment or was in a position that they should have known of the non-payment and to determine who had the authority to pay or direct payment and did not.  Additionally the IRS will often issue a Summons to banks and other record keepers to secure information to further determine potential responsibility.  The IRS will review the interview responses and the payroll and bank records and make a determination as to responsibility.

People or groups of people that may be deemed responsible include:

• Officers and/or employees of a corporation
• Directors and/or shareholders of a corporation
• Members and/or employees of a partnership
• Trustees and/or employees of non-profits
• Anyone with authority and control over funds and the ability to direct payment
• Payroll Service Providers or responsible parties within a PSP

This combination of knowledge and responsibility creates “willfulness” under the law.   If the IRS determines that you are a person responsible for the non-payment of trust fund taxes, a portion of those taxes can be assessed against you and collected from your personal assets. This assessment is called the “Trust Fund Recovery Penalty” and can result in the IRS filing a Notice of Federal Tax Lien against you personally and the potential for serious collection actions, including the levy of your bank accounts and income sources, as well as the potential seizure of your personal assets.

Clearly, the IRS takes the non-payment of Trust Fund taxes very seriously.  If your business is unable to resolve its payroll taxes, we recommend that you contact us immediately to enable us to assist you in what can be a challenging interaction with the IRS.  By being proactive and using our experience with the IRS, you will stand the best possible chance for a positive outcome!

This article was written by Chris Nebel, EA.  Before joining Adam Shay CPA Chris spent 33 years working for the Internal Revenue Service (IRS).