A wide variety of reasons can be advanced as to why business payroll taxes might not be paid.  Those reasons include willful failure to pay and negligence. However, when business payroll taxes are due to the Internal Revenue Service, those business payroll taxes – or “trust fund” taxes – must be paid in full to avoid incurring penalties. Not only can a business owner be held accountable for failure to pay trust fund taxes owed by their company, several other parties who can be held jointly and severally liable for failure to pay trust-fund taxes. Under federal tax law, any “responsible person” can incur personal liability for a business’s unpaid “trust fund” taxes withheld from employee pay.  

Who is a Responsible Person?

The Internal Revenue Service can pursue your personal assets to satisfy a business’s tax liability if you qualify as a “responsible person.” To meet the criteria for a responsible person, you must have been an individual or part of a group who had the duty to collect the “trust fund” taxes and willfully failed to do so or willfully failed to pay over those taxes. In order for willfulness to exist, you must have been or should have been, aware of the outstanding taxes and either disregarded the law or were indifferent to its requirements. More than one party can be considered a “responsible person” for tax liability purposes.  

Common examples of responsible people can include:

• Officers and employees of corporations
• Members and employees of a partnership
• Corporate directors and shareholders
• Members of a non-profit board of trustees
• Third party payers
• Payroll companies 
• Bookkeepers
• Responsible parties within payroll companies
• Professional employer organizations
• Other responsible parties within the company

Even if your business uses a payroll company, as an owner, you are not excused from liability for failure to withhold payroll taxes and remit them to the Internal Revenue Service  — even if you did not know that the taxes were not being paid. While incorporating might protect owners and shareholders from incurring liability from certain corporate debts, the corporate veil does not shield the owner or officers from unpaid “trust fund”  taxes.

What Penalties Can Be Imposed on a Responsible Person for Payroll Tax Liability?

The Internal Revenue Service takes failure to pay payroll taxes seriously. One of the most substantial penalties that can be imposed in connection with failure to satisfy payroll taxes is the “Trust Fund Penalty Tax.” This penalty may be assessed against any responsible person with a duty to collect taxes and willfully did not pay them. The trust fund recovery penalty lets the Internal Revenue Service recover one hundred percent (100%) of unpaid payroll taxes from anyone who qualifies as a responsible person.

Then, the Internal Revenue Service can tack on interest.

The Internal Revenue Service will determine responsibility based on whether the individual exercised independent judgment regarding the company’s financial affairs. An employee would not be considered a responsible person if their role was to pay bills per the instructions of a supervisor, rather than determine which creditors would be paid. While the penalty is typically only imposed on these individuals if the taxes cannot be collected from the corporate taxpayer, the Internal Revenue Service does not have to exhaust all methods for collection before pursuing this avenue. 

The Internal Revenue Code imposes a three-year statute of limitations in place for the Internal Revenue Service to assess a trust fund recovery penalty from the date a return is filed declaring the withheld taxes — or the due return date, whichever comes later. If no return is filed, there is no deadline by which the IRS must assess the penalty. The Internal Revenue Service imposes more penalties imposed for failure to file.  

Apart from a company’s federal tax obligations, a responsible person must understand that a company also has a separate tax requirements and penalties at the state level. A responsible party can be held one hundred percent (100%) personally liable for failure to collect and pay a company’s withholding tax — as well as sales and use taxes — under state law.

Contact an Experienced New York Tax Attorney 

If you are a business owner, or qualify as a responsible person under the tax laws, it’s vital to ensure your company’s state and federal tax obligations are met. Offering skillful counsel and reliable representation, the legal team at Brinen & Associates helps clients with a wide variety of tax matters at both the state and federal levels. Call (212) 330-8151 or send us a message to learn more about how we can help you and your company.