Payroll taxes must be paid first!

Money is tight. You’ve got to make a decision about which bills to pay. Not an uncommon scenario in this economy. For a business, these bills include payroll taxes due. For goodness sake, put these on top of the pile. You have a fiduciary responsibility to remit payroll taxes. Your employees are counting on you to pay in their money for them.

But did you realize that the IRS can cause the responsible person to pay these taxes personally (with penalties and interest)? A recent US Court of Appeals decision (Colosimo, 2011-1 USTC ¶50,178) highlights the definitions of “responsible person” and “willful actions”. When you read these words, think “assessment of big penalties”.

The president of a corporation was deemed a responsible person for purposes of the trust fund recovery penalties assessed against him in connection with the company’s unpaid employment taxes. He had the authority to hire and fire employees, sign checks on behalf of the company, including the company’s income tax returns, and decide which creditors to pay and when. The company hadn’t paid or filed payroll taxes for several quarters in 2000-2002. The president did not know that taxes had not been paid until he received the dreaded IRS notices.

The president blamed the bookkeeper to whom he delegated the authority to pay the payroll taxes. In fact, the bookkeeper may also be a responsible person. However, the alleged malfeasance by the company’s bookkeeper did not absolve the president of the legal obligation to ensure payment of the trust fund taxes.

Instead of paying the taxes when the notices were received, the company paid other debts. So the IRS determined that the president acted willfully because he knew that payments were made to other creditors in preference to the IRS. The courts agreed with the IRS and upheld a $1 million penalty in addition to the $700,000 of unpaid payroll taxes. This company went out of business but the president was personally responsible for the taxes and penalties. Ouch!

As mentioned, the bookkeeper may also be a responsible person and independently liable for these penalties. I don’t know, but I sure wouldn’t want to be him. This case is a good lesson for the importance of paying payroll taxes timely.

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