Skip to main content

How to prevent unpaid payroll taxes/fraud from taking place?

New York, NY |

I was just informed about a friend's company's bankruptcy. They started a professional services firm and made millions of dollars within a year of starting. But the company had two partners and one of the partners served as CFO. The CFO for whatever reason knowingly or unknowingly stopped filing payroll taxes. As it is a given, the IRS/state stepped in and both the partners were held personally liable.

To me that represents a scary situation. I am a moral and loving citizen of our beautiful country and I would never do something like that but what can one do to prevent this kind of a situation from taking place? Because what if your CFO or founder is committing fraud and hiding it.

Is it advisable to always have a trusted third-party accounting/payroll company to do the work?

+ Read More

Attorney answers 4

Best Answer

A payroll Service can help, but the same issues apply unless the other partner is looking at the Payroll Summaries. Hopefully your friend is still within the 60 day window to appeal his assessment. In this particular situation, both business common sense and protecting yourself from IRS Trust Fund Assessment go hand in hand. Anyone who has potential control over the ability to pay a bill, or write a check, can be assessed. The main thing to do is, as mentioned before, is to make sure that on a weekly/monthly basis, the owners/officers not in charge of Payroll have a meeting and request to look at the Payroll reports/Summary, etc. In this case, having a Payroll company doing a direct debit of the taxes makes it easier to see the taxes are being paid. Additionally, the non-payroll involved person should also have a power of attorney for the IRS (Form 2848) for several Payroll periods, to be able to call in and see if the payroll deposits are being made, and the returns are being filed. (or they can have their attorney do it for them :) There is no excuse as far as the IRS is concerned for an officer or owner not to diligently check up on their partner, regardless of how close the relationship is.



Thanks. Excellent response, just the kind of information I was looking for. So one thing, if you are CEO/Founder/Chairman and let's say you sign off on a lot of things but Payroll is not something you actually review and it's the CFO who handles that. Will the CEO/Chairman/President still face some issues?

Marc J. Miles

Marc J. Miles


Most probably. A CEO can not choose not to ensure that Payroll Taxes are being paid, as far as the IRS is concerned. That may not quite be the case if you defend yourself, but the IRS will initially always take that position. Therefore the CEO should monitor payroll reports, have meetings asking the CFO if the payroll is being met, etc.


Yes, no question. A payroll service such as ADP is the way to go. Even well meaning people can make mistakes with payroll taxes, and the consequences could be huge.


An important tip for dealing with business partners: trust but verify! Make sure that you and/or a third party service provider is watching the business like a hawk - especially where taxes and the books are concerned.

This answer is made for educational purposes only. By using or participating in this site you understand that there is no attorney client privilege between you and the attorney responding. This site should not be used as a substitute for competent legal advice from a licensed professional attorney that practices in the subject practice discipline and with whom you have an attorney client relationship along with all the privileges that relationship provides. The law changes frequently and varies from jurisdiction to jurisdiction. The information and materials provided are general in nature, and may not apply to a specific factual or legal circumstance described in the question. To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party, any partnership, investment plan, arrangement, legal structure or other transaction addressed herein.


Always verify that a check has been cut for payroll taxes. The payroll service is the way to go. If there is a problem, it will be known much sooner.

Christopher Larson
Insight Law