November 26, 2021

IRS Determinations Of Responsibility For Unpaid Payroll Taxes

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One of the more difficult parts of being a business owner is dealing with tax issues. The tax laws in the U.S. can be complicated, and those who own or run business can easily make mistakes in payroll taxes. When the IRS believes that a business has not paid all of the payroll taxes it owes, it may pursue payment from not just the business owners, but any person whom it deems a responsible party. People should understand how the IRS determines who is a responsible party, what constitutes willful failure to pay taxes and the potential penalties a person faces for willful failure to pay payroll taxes.

Responsible Party

The court assesses whether a person is a responsible party for the purposes of payroll taxes on a case-by-case basis. The analysis is highly fact-specific and based on a totality of the circumstances of the case. Some of the factors the court weighs in its decision include whether an individual:

  • Has the title of officer, director, principal shareholder or member of a company
  • Has the authority to sign checks
  • Is in charge of the financial affairs of the company
  • Has the authority to choose which creditors the company pays
  • Exercises authority to pay the company’s creditors
  • Controls payroll disbursements
  • Has control of voting stock in the company
  • Signs employment tax returns

Willful Failure to Pay

In order for a responsible party to be liable for willful failure to pay payroll taxes, the IRS must prove one of two things:

  • A person had actual knowledge that the company owed taxes and did not pay them
  • A person should have known that the company owed taxes and was not paying them

The IRS does not need to prove a person knew that payroll taxes were unpaid to make them liable. Showing that the person recklessly disregarded a risk that the company was not paying taxes is sufficient for liability.

Penalties for Unpaid Payroll Taxes

The IRS has administrative authority to assess a Trust Fund Recovery Penalty in the amount of the employee’s share of taxes that were withheld from the employee’s paycheck. The Trust Fund Recovery Penalty is a way for the IRS to collect the full amount of taxes that a business owes, even if the business itself cannot pay them for some reason. The IRS describes the Trust Fund Recovery Penalty as a way to “[facilitate] collection of trust fund taxes from secondary sources.”

Consult an Attorney

The IRS is vigilant in payroll tax matters, constantly looking for those who underpay such taxes. Business owners and operators should not try to take on the IRS without assistance. If you have questions about payroll tax issues, contact a seasoned tax attorney with a proven record of successfully resolving payroll tax cases.

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