Personal Liability For Corporate Payroll Taxes:
Responsible Person Under Section 6672
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Written by: Steven J. Fromm, J.D., LL.M. (Taxation)
When corporations fail to remit payroll taxes, this can be an area of unknown trouble for corporate officers, board of directors or key employees. Generally, shareholders, board of directors or employees are not responsible for corporate debts.
There are certain exceptions and payroll taxes are one area where individuals can be held personally responsible for these corporate tax debts. When corporations have financial difficulty, their president, officers, board of directors, controllers, bookkeepers may take available money to pay general creditors and banks instead of the IRS to keep the company going. This can result in some very serious tax problems and tax liabilities for these parties that prefer creditors over the IRS.
The IRS looks at various factors in determining whether someone involved in corporate operations can be held personally liable for such corporate payroll taxes. Here are some of the more important factors that the IRS looks to in determining responsible person status:
Actual and Significant Authority Over Enterprise Finances or Decision Making
To be liable for the payroll taxes of an entity, a person must have possessed actual and significant authority over an entity's finances and decision making that includes paying the taxes or other corporate debt or expenses.
In addition, the IRS must prove that a responsible person either:
- Knew the payments were not being made, or
- Recklessly disregarded whether they had been made.
Serving As Officer of the Company or As Board of Director
Being in a supervisory capacity such as an officer or director can indicate responsible party status.
Controlling Company Payroll
Even if not an officer or director, a person controlling payroll disbursements can be found to be a responsible person. This often comes as a great and painful surprise to someone who is a bookkeeper or a check writer for the corporation.
Determining or Preferring Which Creditors to Pay and When to Pay Them
The person choosing to prefer other creditors over paying payroll taxes is generally found to be a responsible person.
Participating in Day to Day Operations
Being involved in the daily operations of the business usually is a factor indicating responsible person status.
Possessing Power to Write Checks
Even if not an officer or director, a person controlling payroll disbursements can be found to be a responsible person. Thus bookkeepers are sometimes determined to be responsible persons. Such parties are dragged into this mess having to retain tax counsel to prove that they are not a responsible person.
Having the Ability to Hire and Fire Employees
This type of power may be indicative of the type of supervisory capacity indicative of responsible party status.
Multiple Responsible Persons
An organization can be found to have multiple responsible persons. The IRS usually investigates, interviews and brings a Section 6672 action against as many persons involved in corporate operations as possible.
Bottom Line and Tax Warning:
The above discussion is just an overview of the major issues involved in this area. These cases are usually very fact sensitive so each case tends to be unique. This makes predicting the tax outcome very difficult.
The penalties here are quite severe. In the most egregious cases, in addition to personal liability for corporate payroll taxes, criminal and civil tax fraud actions are sometimes brought by the IRS.
This is one area of the tax law where great care and prudence must be exercised to avoid being a responsible party.
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