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When
employers withhold income taxes and the employees' share of Social Security
and Medicare (FICA) taxes from wages, they are obligated to turn those taxes
over to the government. This withholding on behalf of employees is
referred to as "trust fund" taxes because the taxes are held in
trust for the benefit of the employees. Persons who willfully fail to
timely pay or deposit trust fund taxes may be held 100 percent personally
liable. This liability extends to owners of corporations and limited
liability companies; their form of business organization does not
protect them from personal liability in this instance. While
the 100 percent penalty has been in the tax law for many years, there are
still questions about to whom it applies, as demonstrated in some recent
court decisions. A "responsible person" is someone who has a
duty to collect, truthfully account for, and pay over withholding
taxes. (Code Sec 6672). The Tax Code does not enumerate the
people viewed as responsible persons but case law has helped to clarify the
meaning of the term. Essentially, the "responsible person"
includes anyone with the power to pay taxes. The
determination of whether someone is a responsible person is based on all the
facts and circumstances. Some of the factors taken into account in
making this determination include the person's status as an officer,
director or shareholder; the authority to sign checks and manage day-to-day
business activities; the authority to hire and fire employees; and most
importantly, the authority to decide which creditors to pay. If
there is more than one responsible person, the government can collect from
any one of them. A statutory right of contribution allows a
responsible person who has paid the government to recover a proportionate
share from another responsible person. (Code Sec. 6672(d)). A
chief financial officer of a corporation may have check-writing authority
and the ability to make many day-to-day decisions about business matters
without being labeled a responsible person. One such case involved a
CFO with an impressive title who had the authority to sign checks, but did
not hold a position on the board or own any corporate stock. In this
case, only the president could negotiate large purchases, contracts and
loans; open and close bank accounts; guarantee or co-sign corporate loans;
and determine company financial policy. When
the president ordered the CFO to pay certain creditors with trust fund taxes
that should have been deposited with the government, the CFO complied.
The IRS tried to collect the 100 percent penalty from the CFO, but the U.S.
Court of Federal Claims help that the CFO was not a responsible person. (Salzillo,
Ct. Fed. Cl., 2005-1 USTC ¶50,324).
The IRS argued that he could have quit his job rather than misdirect trust
fund money, which certainly would have avoided the charge that he was a
responsible person. The court noted, however, that failing to quit a
job does not make someone a responsible person. In
another case, an employee of an accounting firm that handled a restaurant's
books, payroll, and accounts receivable was charged by the IRS to be a responsible
person. He could sign the restaurant's checks and helped the owner
prioritize creditor payments. When the restaurant fell behind in its
payroll tax deposits, the owner and the accountant met with the IRS.
At the conclusion of the meeting, the accountant signed Form 4180, Report
of Interview with Individual Relative to Trust Fund Recovery Penalty or
Personal Liability for Excise Tax. According
to the IRS, the accountant admitted liability for the taxes by signing the
form. In turn, the IRS tried to collect the funds from him. A
U.S. District Court held, however, that the accountant was not a responsible
person. (Secret, Jr., DC. W.Va., 2005-1 USTC ¶50,406).
The court reasoned that the accountant lacked the authority or ability to
pay the taxes. While he could sign checks, he did so only at the
direction of the restaurant owner. Being a signatory on the company's
bank account did not show that he had the authority to write a check without
the owner's prior approval. Moreover,
the fact that the accountant discussed with the owner which creditors to pay
did not establish the accountants' authority concerning payment. The
owner had the final authority over which creditors to pay. Signing
Form 4180 also did not establish liability. The form did not contain
an admission of liability by the accountant and no such liability was
mentioned in the meeting with the IRS agent.
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