Can a Company Officer Be Liable for Failing to Pay Payroll Taxes?
Many small businesses fall behind in paying these taxes or filing the associated reports at some time during their existence. Such an error is, however, very costly because significant interest and penalties apply for late payment or nonpayment of payroll taxes. In fact, the Trust Fund Recovery Penalty allows the IRS to hold a small business owner or accountant personally liable for 100 percent of the amount owed, even in cases where the business has gone bankrupt.
This penalty for the failure to withhold or remit payroll taxes, known as the Trust Fund Recovery Penalty (TFRP), is included under Section 6672 of the Internal Revenue Code. It allows the IRS to hold individuals associated with a business personally liable for 100 percent of the unpaid amount when the business fails to meet its payroll tax obligations. The TFRP applies to employee funds that the employer holds in trust for the IRS—all of the regular income tax withheld and the employee half of the FICA tax—but not to the employer portions of payroll taxes. The penalty is particularly severe because the IRS considers an employer who fails to pay to be violating a trust. The TFRP can be applied in addition to civil and criminal penalties, including the seizure of business assets and forced closure of the business. And since it is a penalty rather than a tax, the TFRP is not erased by bankruptcy.
In order to apply the TFRP to an individual, the IRS must prove the person's responsibility (that he or she had the power to make the decision about whether or not to pay) and willfulness (that he or she knowingly failed to act rather than made an honest mistake) for the business's failure to remit payroll taxes. In making its determination about who to hold responsible, the IRS looks at who made the financial decisions in the business, who signed the checks, and who had the duty of tax reporting. Under these rules, a small business owner can be found personally liable even if a staff member or outside accountant was directly responsible for payroll tax compliance. In cases where both the business and the owner go bankrupt, the company's accountant may be tagged as the responsible party and held personally liable.