Individual Liability for Business’ Failure to Pay Payroll Taxes

03 Oct Individual Liability for Business’ Failure to Pay Payroll Taxes

By: The Firm • Posted 10/03/13

Concerned new clients regularly come to us with the following inquiry: “The IRS can’t hold me personally responsible for my business’ payroll taxes because the business and I are separate entities, right?”

Unfortunately, we are often in the position of having to explain to incredulous business owners that the IRS can in fact hold them personally responsible for payroll tax deficiencies. While it is true that incorporating a business or otherwise registering the business as a separate entity generally veils a business owner’s personal assets from liabilities arising out of the conduct of the business, this is not the case when it comes to the IRS and the collection of payroll taxes. Whereas a creditor must ordinarily mount a case for “piercing the corporate veil” in order to reach the personal assets of an individual member of an LLC or a shareholder of a corporation to satisfy a debt, the IRS is not required to do so.

The IRS does not have to mount a case to pierce the corporate veil in order to collect past-due payroll taxes from individual business owners. Congress passed a law expressly giving the IRS authority to do so. Title 26 of the United States Code, section 6672(a) (I.R.C. § 6672(a)) expressly states that

[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

The IRS calls this the “Trust Fund Recovery Penalty” or “TFRP.”

Of course, like most tax issues, imposing the TFRP is not a cut-and-dry process. In fact, in reading the language of the statute a few questions may have come to mind, the first of which may be: “What does this even mean?” Plainly put, even if your authority for decisions was limited to financial matters, a personal assessment against you is possible for all or a portion of the debt owed by the business.

You may also be asking: “How does the IRS determine whether I was the individual required to make key decisions regarding payroll taxes? I have partners and I’m not even sure that divisions of responsibility are clearly drawn?” Another critical question you may be asking is: “What does the phrase ‘willfully fails’ mean?” Finally, you may be asking: “Can the IRS take my assets without establishing the answers to these questions?”

The answer to the final question is no, it cannot. Prior to imposing the TFRP, the IRS is required to establish the answers to the foregoing questions and that you are a responsible individual under the statute. Although it need not pierce the corporate veil, the IRS must adequately establish the pertinent roles of your business’s personnel and whether willfulness was present in the failure to pay payroll taxes. But adequate protection during such a lengthy and complicated process requires the skill and experience of a seasoned representative.

If you find yourself being questioned by the IRS concerning your business’s payroll taxes, please do not hesitate to call one of the attorneys at Kelly | Dorsey. We have been there before, and have over 50 years of combined experience dealing with the IRS. Our attorneys will aggressively defend your rights and protect your overriding legal interests while making every effort to ultimately resolve your tax issue.

If you would like to learn more about Kelly | Dorsey’s criminal tax defense, civil tax litigation, IRS audits, and IRS collection practice groups, please fill out and send the Contact Form on our Contact Us page. You can also connect with Kelly|Dorsey through Facebook, Twitter, Linkedin, and Google+. Tax Controversy Group Chair Gerald W. Kelly can be reached via e-mail atgkelly@kellydorseylaw.com or telephone at (410) 740-8750.