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Business Owners: You Can Be Personally Liable for 100% of Your Employees’ Federal Tax Withholdings

Business Owners: You Can Be Personally Liable for 100% of Your Employees’ Federal Tax Withholdings

The IRS Trust Fund Recovery Penalty (“TFRP”) imposes personal liability on someone deemed to be a responsible person (“Responsible Person”) for a company. The TFRP consists of the amount of tax that a company (“Company”) withheld from its employees (“Withholding”) and failed to deposit for federal tax purposes. The IRS may assess a TFRP against a Responsible Person who is found to have willfully failed to collect and pay a Company’s Withholding. Once the IRS assesses the TFRP against you, the IRS can take collection actions, including liens and levies, against your personal assets. The TFRP is not dischargeable in bankruptcy.

A Responsible Person is any one person or group of people who is responsible for collecting or paying a Company’s withheld income and employment taxes. Depending on the Company’s organization, a Responsible Person can include any of the following:

  1. A corporate officer;
  2. A corporate director or shareholder;
  3. A Company’s member or partner;
  4. Anyone in the Company’s accounting or finance department who has authority and control over the company’s disbursements; or
  5. A person with signatory authority for the company’s bank account.

 

This is not an exhaustive list. In sum, the IRS could deem as a Responsible Person anyone who has control over disbursements for a Company. To be found willful of failing to collect or pay Withholding, a Responsible Person must have been or should have been aware of the Company’s outstanding Withholding liabilities. In addition, the Responsible Person must have either intentionally disregarded the law or was plainly indifferent to the law’s requirements with respect to collecting and making federal deposits of the Company’s Withholding. The IRS will often find willfulness where the Company uses funds to pay other creditors when the business is unable to pay its Withholding. Note, however, that a finding of responsibility is based on whether the person could exercise independent judgment regarding the Company’s financial affairs. Consequently, a person whose job it is to write out checks for a Company at the direction of someone else is not a Responsible Person.

To avoid the TFRP, make sure all employment taxes are collected, accounted for and deposited as required pursuant to federal tax law.

For more information regarding the TFRP or for assistance with an employment tax audit, please contact Michele Weiss at 310-550-6200; mweiss@hsdtaxaw.com; or click on this link:

Michele F.L. Weiss