Every business with employees is required to pay payroll taxes However, occasionally a business may find itself running short on cash with specific debts, such as rent and bills to suppliers for example, taking immediate priority over taxes and using the money collected and set aside to pay payroll taxes can seem like a quick fix. Unfortunately, this is a very dangerous hole to dig and failure to pay payroll taxes when they are due can lead to some of the largest penalties and interest that exist in the revenue code. Within just a few weeks of failing to pay a business may find itself owing an insurmountable sum and if the business is unable to pay the IRS will begin tax collections actions against the business owner, corporate officers, and anyone else connected with the organization that had any decision making ability or access to the business bank account. Failing to pay Sales and Employment taxes is serious business.

Responsible Parties may be held individually liable for unpaid taxes.

Certain employees of corporations and LLCs could be liable for taxes owed by their employer if the employer fails to pay them on time. This includes federal employment taxes and sales and use taxes. The employment taxes due to the IRS are supposed to be withheld from employees’ wages and paid to the IRS. Sales taxes should be withheld on retail sales of tangible items and use taxes on items purchased for use in California from an out-of-state retailer. These taxes owed – if not paid by the employer – can become a liability of an employee deemed to be a “Responsible Party” if that person acted “willfully” in failing to collect or pay over the withheld taxes.

Who is a Responsible Party?

A determination of responsibility depends upon the facts and circumstances of each case. IRM 5.17.7.1.2 explains that the crucial test is whether the person has the “effective power to pay the taxes owed.” Purcell v. United States , 1 F.3d 932, 937 (9th Cir. 1993). A person is deemed to have such power if he or she possesses the authority to exercise significant control over the company’s financial affairs whether or not such control is in fact exercised. Purcell at 937. In making this determination, the courts looks at factors such as the person’s position in the company (officer, director, principal shareholder, etc.), duties of the officer, authority to sign checks, and others.

What is considered “willful failure” to collect and pay taxes owed?

Domanus defines “willful” as intentional, deliberate, voluntary, reckless, or knowing (not accidental). No evil intent or bad motive is required. Domanus v. United States, 961 F.2d 1323 (7th Cir. 1992). Davis contextualizes this definition by explaining that it’s a willfulness by a responsible party to pay other creditors over the United States. Davis v. United States, 961 F.2d 867 (9th Cir. 1992). IRM 5.17.7.1.3.3 explains that the government must show that the responsible party was aware of the outstanding taxes and either deliberately chose not to pay the taxes or recklessly disregarded an obvious risk that the taxes would not be paid. Phillips v. United States, 73 F.3d 939, 942 (9th Cir. 1996).

How can a tax attorney help me?

The 2-part test to prove liability is a subjective inquiry. This is a result of each case being determined on its facts and circumstances. Such inquiries are best handled by a tax attorney that has experience and understanding of the factors courts may consider in determining liability. Representing oneself in this type of determination, or being represented by an inexperienced attorney, can lead to substantial liability. This liability can be avoided with the representation of a knowledgeable and experienced tax lawyer. The definitions noted above apply to trust fund taxes and employment taxes owed. These definitions vary slightly for sales and use tax and should be analyzed by a competent tax attorney.

For a free consultation with the full protections of attorney client privilege, call me, The Tax Lawyer - William D Hartsock at 858-481-4844 or simply fill out the contact form on this page.


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