The Consequences of Willful Failure to Pay Payroll Taxes: The Penalties for Failing to Pay over Trust Fund Taxes Can Be Severe and Sometimes Include Prison Time

[ILLUSTRATION OMITTED] An employer is required to withhold federal income and payroll taxes from its employees' wages and pay them to the IRS. Withheld payroll taxes are called trust fund taxes because the employer holds the employees' money (federal income taxes and the employee portion of Federal Insurance Contributions Act (F1CA) taxes) trust until a federal tax deposit of that amount is made (Slodov, 436 U.S. 238 (1978)). Sec. 6672(a) provides that required to collect, truthfully account for, and pay over any tax imposed the Internal Revenue Code who willfully fails to do so, will, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax ... not collected ... and paid over. The term is important because Sec. 6672(a) allows the IRS to pierce the corporate veil and proceed against any who is for the corporation's failure to pay over trust fund taxes, thereby making that personally liable for the employer's unpaid payroll taxes (White, 372 E2d 513 (Ct. Cl. 1967)). Therefore, the penalty can be imposed on any person, regardless of the form of business entity. Both the and the willful failure tests have to be met for the trust fund recovery penalty to apply Once the penalty is assessed, the held for the failure has the burden of disproving both those elements. RESPONSIBLE PERSON TEST Both the IRS and the courts broadly define a responsible person. The key element determining status is whether a person has the statutorily imposed duty to make the tax payments (O'Connor, 956 E2d 48 (4th Cir. 1992)). Several factors indicate responsibility, including whether the (1) has power to compel or prohibit the allocation of funds (Godfrey, 748 E2d 1568 (Fed. Cir. 1984)); (2) has the authority to sign checks; (3) has the authority to make decisions as to disbursement of funds and payment of creditors; (4) is an officer or director of the corporation; (5) has control over the company's payroll; (6) prepares and signs payroll tax returns; (7) actively participates day-to-day management; or (8) hires and fires employees (Barnett, 988 E2d 1449 (5th Cir. 1993)). Although the above list is not exhaustive, the status, duty, and authority of an employee principally determine whether the is under Sec. 6672 for paying over withholding taxes to the United States (Mazo, 591 F2d 1151 (5th Cir. 1979)). However, IRS Policy Statement 5-14 (Internal Revenue Manual [section]1.2.14.1.3), the IRS stated that individuals who are nonowner employees performing ministerial acts without exercising independent judgment will not be deemed responsible. Often, company officers do not want to be bothered with accounting or tax matters. It is not uncommon for a director or chairman to instruct an employee to take care of paying payroll taxes. If that employee fails to pay payroll taxes, the officer should be worried. Delegation of authority does not relieve a of responsibility to collect and pay taxes to the IRS. Courts have consistently held that the authority that permits control carries with it a nondelegable duty to ensure that withholding taxes are duly collected and paid over to the government (Purcell, 1 E3d 932 (9th Cir. 1993)). The trust fund recovery penalty can also be assessed against a corporate officer who fails to pay over withheld taxes at the direction of a supervisor when sufficient funds are available. Sometimes an officer who is aware of the delinquent taxes does not pay out of fear of getting fired for disregarding instructions not to pay. The threat of being fired by a supervisor for paying the taxes will not make the less for paying the amounts owed (Howard, 711 E2d 729,734 (5th Cir. 1983)). Courts have held that an officer is not entitled to prefer his own interest continued employment over that of the government (Brounstein, 979 E2d 952, 956 (3d Cir. …