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.
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.