I am writing this article to remind you of the importance of paying over to the IRS taxes that are withheld from your employees’ wages. As an officer/owner of your business, you are the first person the IRS will look to, to collect any unpaid withholdings. I cannot emphasize enough this point: If found to be the person responsible for withholding, collecting, and paying these taxes over to the IRS, you will be personally liable for any nonpayment that is considered to be willful. This means that you will have to pay the taxes out of your own pocket.
Under the system established for withholding taxes, your employees are credited for any taxes withheld from their wages. Your company is deemed to hold the withheld taxes “in trust” for the federal government. This is why withholding taxes are referred to as “trust fund taxes.” Often times, businesses that experience financial trouble will use taxes withheld from employees’ wages to pay creditors and suppliers in order to keep the business afloat. However, if the business eventually fails, the employees are not liable for the unpaid taxes, and the business probably doesn’t have sufficient funds to satisfy the trust fund tax liability.
By enacting § 6672 of the Internal Revenue Code, Congress made sure that the government would have the means to recover trust fund taxes if, for whatever reason, they are not paid. Section 6672 imposes personal liability on any person who is required to collect, truthfully account for, and pay over trust fund taxes but who willfully fails to do so. In the past, this has been referred to as the “100% Penalty” because the amount of liability is equal to 100% of the taxes withheld from the employees’ wages. More recently, the IRS calls this the “Trust Fund Recovery Penalty.”
Let us look at the elements for liability under § 6672. First, to be liable, a person must be a “responsible person.” There is no one factor that makes an individual a responsible person. Generally, a responsible person is the one who has the power and authority to control the business’s decision-making process regarding the payment of creditors. In most cases, the IRS looks to officers and owners of a business as responsible persons because they are the ones who make the decision concerning which creditors to pay and which ones not to pay. Courts have found stockholders, directors, managers, bookkeepers, and people outside the business to be responsible persons because they had the ultimate authority over the disbursements of the business’s funds. More than one person can be held liable, too.
Still, there is a second element without which a responsible person is not liable for the Section 6672 penalty: Willfulness. Willfulness does not mean that there is some bad motive or intent. Rather, for these purposes, willfulness can be established if there is evidence that the responsible person(s) knew that payments were being made to other creditors or suppliers at a time when withheld taxes were not being paid to the IRS. In some cases, the responsible person does not actually have to be aware that the taxes are not being paid if there is a history of nonpayment of trust fund taxes at times of financial crisis.
You can see from this brief discussion that it is not difficult for the IRS to impose personal liability for unpaid trust fund taxes on the person responsible for making the financial decisions in a business. Moreover, this liability never goes away. For instance, it would survive a personal bankruptcy. Yet, there are ways to structure business holdings to protect the family’s assets and home. I hope that your business will continue to enjoy its success, but I think it is a good idea for us to meet and make sure that you are doing everything possible to protect you and your personal holdings from liability in the event something should go wrong.