Employers Beware: Failure to Pay Employee Withholdings Can Result in Personal Liability

 

A relatively common occurrence with many businesses, is a failure to pay over withheld income and employment taxes. Often cash-strapped businesses hope that conditions will improve and decide to use the withheld taxes as working capital to fund operations. The Internal Revenue Service and other taxing authorities HATE being an "unwilling participant in a floundering business".

In response to all too often finding itself as a unwitting lender, the Internal Revenue Service received authority from Congress in 1954 to assess personal liability against "responsible persons that willfully fail to pay over" withheld income and employment taxes.

The Trust Fund Recovery Penalty results in personal liability for 100% of the withheld income and employment taxes ("Trust Fund" taxes) for every "responsible person" assessed. While deemed a penalty, the Trust Fund Recovery Penalty is a collection device used by the Internal Revenue Service to recoup those taxes it has credited to other taxpayers. Lawyer firm in Illinois. As such, the Service typically assesses the penalty against as many taxpayers as possible, to increase the odds of repayment. While this may seem to be unfair, it depends on who you ask.

Example: ABC, Inc. owes federal payroll taxes of $1,000,000.00, of which $750,000.00 are "Trust Fund" taxes. ABC, Inc.'s President, Vice President, Chief Financial Officer and Treasurer were all assessed the Trust Fund Recovery Penalty. As a result, each person assessed the TFRP owes the US Treasury $750,000.00, which accrues interest until paid. The IRS is prohibited from collecting more than $750,000.00 (excluding interest) no matter the source. So let's say ABC, Inc.'s President pays $500,000.00, Vice-President pays $225,000.00, and Treasurer pays $25,000.00. According to ABC, Inc.'s CFO, it seems like a good deal. All he owes is the interest. Of course, the best course of action is not to count on luck. The best way to avoid this conundrum is to make sure the withholdings are deposited in the correct manner and on schedule. Don't make the mistake of failing to deposit: it can cost you more than just your business.