Be sure to pay all payroll taxes
Corporate officers’ liability for responsible person penalty upheld on summary judgment
Even if you do not own any stock in a corporation, you can be personally held to pay unpaid payroll taxes on all employees. So be sure that all payroll taxes are paid regardless of whether it puts the company at risk of survival.
A district court has determined on summary judgment that several officers of a corporation that was years behind on its income and payroll taxes were liable for the Code Sec. 6672 penalty. The court found that each individual, within certain time periods, had sufficient authority within the company to be considered a responsible person. In addition, each individual had acted willfully where he could have directed that unencumbered funds be used to pay off the company’s tax debts, including those for periods before he had actual knowledge of the deficiency. Now willfully to the IRS means something different to most people than to the IRS.
Background. Code Sec. 6672 imposes the trust fund recovery penalty on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. The amount of the penalty is equal to the amount of the tax that was not collected and paid.
In determining whether an individual is a responsible person, courts consider factors including whether the individual: is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority. Responsibility is generally a matter of status and authority, and it is determined on a quarter-to-quarter basis. In determining whether there is willfulness, the courts have focused on whether a taxpayer had knowledge about the nonpayment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.
If you can authorize payments to creditors, including payroll, and was a signatory on ICOA’s bank account and exercised check signing authority, you can be held to be a responsible p person and forced to pay the tax the company owed.
Turning to the issue of willfulness, the court noted that “I[t] is settled law that a responsible person who becomes aware that taxes have gone unpaid in past quarters in which he was also a responsible person… is under a duty to use all “unencumbered funds” available to the corporation to pay those back taxes.” In this case, although someone does not learn of the tax delinquency until later showed that the company had sufficient unencumbered funds available to pay the taxes assessed for the period. Because the officer failed to do so, he was considered to have acted willfully for that period. For the period after he learned of the delinquency, the court found that, by continuing to pay employees, he willfully preferred other creditors in lieu of paying taxes.purposes.
