Employers are required to withhold federal income taxes and social security (FICA) taxes from their employee wages and are liable for payment of these taxes to the IRS.These funds are considered to be held in trust and cannot be spent for any purpose other than remittance to the government.These funds arereferred to as "trust fund taxes." It is important to note that trust fund taxes do not include the employer's matching portion of FICA taxes.
To facilitate the collection of unpaid trust fund taxes, persons statutorily responsible for making sure the taxes are paid are held personally liable. The IRS will seek a 100% penalty against certain individuals considered to be responsible parties for the payment of trust fund unpaid withholding taxes. The penalty is in addition to any other penalties that may be properly assessed. The penalty does not apply to the employer's portion of FICA and to federal unemployment taxes.
An individual who has a responsibility to collect withholding taxes imposed on another person and remit the taxes to the IRS is considered a responsible person. For the responsible person to be assessed the 100% penalty, there must be a willful failure to collect and pay over the taxes. Responsible persons can include officers or employees of a corporation, members or employees of a partnership, creditors who purchase a business, bookkeepers, consultants, volunteer members of a board of trustees, and lenders. Shareholders and officers of the company have defenses to the prposed assessment and are not necessarily responsible parties.
In many situations it is difficult, based solely on the IRC, to determine who the responsible person is and whether there is a willful failure to collect and pay the taxes. The ultimate determination of responsible persons is often decided upon by the courts. The courts have taken a broad view of the term "responsible person," repeatedly stating the penalty should be imposed on persons who have the ultimate authority to decide the priority of bill payment and who willfully pay other creditors, rather than paying the payroll taxes. However, there is no single criterion used in determining this authority. Court cases have set forth the common identifying characteristics of a responsible person. A few landmark cases establishing these characteristics are discussed below.
In Watson v U.S., [583 F. Supp. 1166 (Ariz. 1984)], the court found Watson was not a responsible person even though he paid the bills and signed the checks. Watson acted under the direct authority of the corporation's president, who alone determined which creditors would be paid. The court found the duties of signing checks and preparing tax returns were not solely determinative of liability.
In Gustin v. U.S., [88 F.2d 1370 (5th Cir. 1989)], the Court of Appeals reversed a lower court decision that assessed Gustin the 100% penalty for failing to pay over withholding taxes. The Court of Appeals found evidence that showed Gustin did not willfully fail to pay the taxes and did not have effective power to pay the taxes. Although Gustin was the president of the company, he had no control over or access to the company's books and financial records, and he had no responsibility for calculating or paying the company's taxes. This case establishes that a mere corporate title may not be sufficient to assess the 100% penalty.
In Schroeder v. U.S., [900 F. 2d 1144 (7th Cir. 19900], Schroeder, the chief financial officer, signed checks on behalf of the corporation. She was instructed by the chief operations officer not to remit trust fund taxes. She did not have discretion over which bills to pay. She merely wrote the checks as directed by her superior, who made the ultimate decision. The court found Schroeder was not a responsible person because she lacked control over daily business activities and lacked authority to pay other creditors. Please call my firm at 512-330-9977 to set up a consultaiton to discuss your case.
These materials have been prepared by Fred E. Walker, P.C. for informational purposes only and are not legal advice, do not necessarily reflect the opinions of Fred E. Walker, P.C. or any of its attorneys or clients, and are not guaranteed to be correct, complete, or up-to-date. This site is not intended to create, and access to or receipt of information included in this site does not constitute, a lawyer-client relationship. No one should act upon this information without seeking professional counsel. Although we would be pleased to communicate with you by e-mail or otherwise, do not send us information until you speak with one of our lawyers and get authorization to send that information to us. Please be aware that if you communicate with us by e-mail or otherwise in connection with a matter for which we do not already represent you, your communication may not be treated as privileged or confidential. If you communicate with us by e-mail in connection with a matter for which we already represent you, please remember that Internet e-mail is not secure and you may wish to take steps to encrypt sensitive or confidential materials before sending them on the Internet.
From you comments appears you may have two problems: 1. while you were an officer or director the company lost its limited liability charter due to failure to pay state franchise tax, and therefore you are personally liable for its debts, and 2. the company failed to pay payroll taxes and the IRS has assessed the trust fund recovery penalty against you since you were an officer or director of the company. A complicating factor in your consideration of bankruptcy is that the trust fund recovery penalty (civil penalty) for unpaid payroll taxes, is not dischargeable in bankruptcy. If the trust fund recovery penalty has already been assessed against you, you have missed your opportunity to appeal it, and there are only limited remedies left available to you.
This information is provided for educational purposes only, and is not to be relied upon as legal advice. You should consult with an attorney with full disclosure of all facts and opportunity to consider all or alternative options.
This portion of this site is for answering general legal questions.
You indicated that you need to find a lawyer. Use the find a lawyer tab above to find a good local bankruptcy lawyer. Many of them have extensive experience in dealing with the types of IRS issues you identified.
Employment law for businesses Business partnerships Small business taxes Bankruptcy Debt Bankruptcy and debt Business Employment Unemployment compensation Paying taxes on unemployment compensation Employee wages Employee wages and payroll taxes Employee wages and FICA taxes Social security Tax law Appeals