Businesses often close leaving behind various debts, including taxes. It’s a common belief that once the business closes those debts die with the business, so why are you getting an IRS notice years later? The IRS treats payroll taxes different than income taxes and splits them into two parts. The first part is the employee’s income taxes that are withheld from their paycheck, and the second part is Medicare and Social Security taxes the employer is required to withhold from an employee’s paycheck.
Personal liability for unpaid payroll taxes involved the first part, which is referred to as the Trust Fund portion. The taxes are withheld from an employees paycheck should be kept in trust by the business and then submitted to the IRS. When a business falls behind on the payroll taxes and fails to submit that trust fund, the IRS considers it theft since the funds actually never belonged to the business. This is why the IRS aggressively pursues back payroll taxes and allows the corporate veil to be pierced.
The IRS can assess the trust fund against anyone persons it deems responsible. It defines a responsible person as any person who is responsible for collecting or paying income and employment taxes, and willfully failed to collect or pay them. Often times the responsible party is the business owner but other employees, such as a bookkeeper or those who can sign checks, have had the trust fund assessed against them as well. In order to determine responsible persons and assess the trust fund, the IRS assigns a Revenue Officer (RO) to the case. The RO does an investigation and makes personal assessments based on their findings. The IRS will assess the trust fund against multiple people, which means each party will be responsible for the entire amount. In addition to the amount of the trust fund taxes, the IRS will charge significant penalties and interest that will continue accrue until the debt is resolved.
We often hear people say “I don’t own the business so this won’t affect me.” As mentioned, the IRS can and will go after numerous parties for that trust fund portion. A few years back a court in North Carolina held a business’s CPAs responsible for the unpaid payroll taxes. The court found that the CPAs had significant authority over the finances of the client and therefore they were responsible persons. In another case, the CFO had to take the IRS to court when they assessed the trust fund against her. The court found the CFO of a casino was not a responsible person even though she has check-signing authority and had prepared and signed tax returns previously. It was determined that she did not have significant control over the casino’s finances, did not have control over payroll, and could not authorize federal tax deposits. While the CFO was able to get out of that trust fund assessment, it was not an easy fight.
Trust fund assessments can occur if a business is still operating or if a business has closed. If you do not believe you are responsible, it’s important to seek representation as early as possible to protect your personal assets from any levies, liens or garnishments. If you’re worried about how back payroll taxes could impact your future, gives us a call and we can explore your potential liabilities.