If an employer fails to collect and pay employment taxes, the owners and executives (generally the CEO, CFO, and Secretary) who are responsible for paying and withholding wages and employment taxes may be personally liable for their company’s uncollected taxes both under federal law and California law. IRC §6672; CUIC § 1735.
“Trust Fund Recovery” penalty
The IRS and California Employment Development can assess a portion of the unpaid payroll taxes under a rule called the “Trust Fund Recovery” penalty. The assessment, in fact, is not a penalty but the government’s ability to legally hold a “responsible person” liable for the portion of taxes withheld from employees’ paychecks but never paid over to the government.
Recently, Treasury Inspector General recommended that IRS enforce the trust fund recovery penalty sooner and more often. As of June 30, 2012, employers owed the IRS approximately $14.1 billion in delinquent employment taxes. This audit was initiated to determine whether the Collection Field function is taking adequate and timely actions against responsible parties in companies that have outstanding payroll taxes.
Understanding the Consequences of Non-Compliance with Payroll Tax Laws
While the idea of being personally held accountable for a company’s unpaid payroll taxes may seem daunting, it’s crucial to comprehend the gravity of the situation. The Internal Revenue Service (IRS) and the California Employment Development Department (EDD) do not take lightly to breaches of payroll tax laws. It is estimated that as of June 30, 2012, employers collectively owed the IRS approximately $14.1 billion in delinquent employment taxes. Consequently, these governmental bodies are taking stringent actions to recover these monies.
The Trust Fund Recovery Penalty: A Closer Look
Under the Trust Fund Recovery Penalty rule, the IRS and EDD have the legal right to hold a “responsible person” liable for the unpaid portion of taxes that were supposed to be withheld from an employee’s paycheck. It’s essential to understand that this assessment is not a penalty in the traditional sense. Rather, it’s a mechanism for the government to seek redress for non-compliance with tax laws.
In light of these circumstances, the Treasury Inspector General has recently recommended that the IRS should enforce the Trust Fund Recovery Penalty sooner and more frequently. This move is set to be a game-changer, further underlining the importance of ensuring that companies stay on top of their payroll tax obligations.
Defining the “Responsible Person”
The term “responsible person” typically refers to the people who have the power to collect, account for, and pay over the payroll taxes of a company. These individuals are generally the officers, directors, or shareholders of a company. It’s worth noting that liability can extend to anyone who performs these tasks, not just the individuals who hold these titles. This makes it even more critical for individuals in positions of authority to be aware of their roles and responsibilities when it comes to payroll tax compliance.
Possible Defenses and Legal Rights
If you find yourself in a situation where you could potentially be held accountable for your employer’s unpaid payroll taxes, it’s important to remember that you may have defenses and other legal rights. For instance, you might not be considered a “responsible person” if you didn’t have the authority to control, direct, or manage the funds at issue.
Additionally, even if you are a “responsible person,” you might not be held liable if you can show that you did not act willfully in failing to pay over the taxes. These complex legal issues require careful navigation, and it’s always advisable to seek professional help to safeguard your interests.
The Importance of Seeking Professional Legal Help
The team of tax attorneys based in San Diego is well-versed in these types of cases and can provide the necessary guidance and support. They can help you understand your role, the potential risks involved, and the defenses available to you. Their expertise can be invaluable in navigating the complexities of payroll tax laws, potentially saving you from severe financial implications.
In conclusion, being aware of your potential liability for your employer’s unpaid payroll taxes is critical, particularly for those in executive roles or individuals who have control over a company’s funds. With professional legal guidance, you can better navigate the complexities of these laws and protect your rights.