Frequently, someone in your company—it may be the president, vice president, treasurer or some other officer—will have assumed the duty of collecting and depositing federal payroll taxes. That person could be in for a rude awakening one day.
According to an onerous provision in the federal tax law, any person who willfully fails to deposit the required income tax withholding or employment taxes can be held personally liable for any unpaid taxes. This is one time when the corporate shield cannot protect an individual.
How much is this penalty? The person found to be responsible may have to pay an amount equal to the total tax due—in other words, 100% of the liability. That is why tax practitioners have referred to this rule in the past as the “100% penalty” (now often called the trust fund recovery penalty).
What constitutes a “willful” failure for this purpose? It doesn’t take much to be held responsible if you rely on past cases and rulings. The failure on the part of the responsible person does not necessarily have to be intentional.
The tax landscape is littered with cases where the 100% penalty was levied against unsuspecting parties. Recently, liability was upheld for the higher-ups of an automobile parts manufacturer after the controller did not make the necessary payroll deposits. The officers, who were previously determined to be responsible parties, did not have personal knowledge of the delinquency. Nevertheless, the district court in Michigan said they recklessly disregarded the risks by failing to personally verify payments and relying instead on the controller’s assertion, even though they knew he was unreliable (Byrne v. United States, DC-MI, 116 AFTR2d 2015-5502).
Is there anything you can do to protect yourself against the 100% penalty? There are no guarantees, but here are five practical suggestions.
1. Mark each payroll due date on your desk calendar, appointment book or other ledger that you refer to frequently. Or you might use an electronic device such as a smartphone for this purpose. This will keep you aware of approaching deadlines. Have your assistant do the same thing.
2. If you delegate the responsibility, keep abreast of the collection and payment process. For instance, you can have the designated person send you a note confirming that the taxes have been paid.
3. It may be advantageous to assign the duty to two or more assistants. You cannot be too careful in this area.
4. Whether you decide to delegate the responsibility or not, designate a substitute in case of sickness, vacation or unforeseen circumstance.
5. Consider outsourcing the payroll tax responsibilities to an outside professional.
Final words: Provide details about the responsibilities for collecting and depositing payroll taxes in the corporate minutes. These simple precautions may end up saving you thousands of dollars in the long run.