Am I Liable for My Company’s Taxes?
You notice that a lot of tax notices are coming in. You try to read the notices, but the bookkeeper whisks them away, telling you they are nothing. Weeks later the IRS walks in the front door, as the bookkeeper runs out the back door. You find out the payroll taxes haven’t been paid in over a year, and the bookkeeper has stolen the money. The IRS wants the money from you. What do you do?
Normally an owner or shareholder of a company is not liable for the taxes of the company. However, when a certain class of taxes is not paid to the tax authority, the business owner can be individually liable for the tax.
What Are Trust Fund Taxes?
Only some taxes are included in this category. They are sales taxes and payroll taxes withheld. These taxes are called TRUST FUND TAXES as they were taken “in trust” by the business owner.
The trust fund tax then gives rise to the “100% penalty,” a legal device whereby the tax is transferred from the business to the owner. It is also called a CIVIL PENALTY. Within the IRS, this penalty is created by Section 6672 of the Internal Revenue Code.
What Can I Do?
If you have filed your business tax return as a corporation or a multi-member LLC, you have some protection from the 100% penalty, but not total protection.
You are entitled to a hearing on the assessment of a civil penalty. If you knew the tax was unpaid, or you should have known, you will probably be found to be a “responsible person,” meaning that the tax can be collected from you. You are liable for all of the tax, even though you have partners. They are each also liable for all of the tax.
As a matter of good practice, one should always contest the assessment of a civil penalty. Often the assessment of a civil penalty is proper, but sometimes the threat of assessment is used against clerical help, such as a bookkeeper or accounts payable clerk, in order to gain information into the workings of the company. This sort of threat of assessment should always be challenged.
If you have filed your business tax return as a corporation or as a multi-member LLC, you have some protection from this penalty, but not total protection. This partial protection is accomplished in a complex way, taught to me by a veteran IRS agent in New York City. How we do this is a business secret, so contact us to see if you qualify. The time to act forcefully and effectively on past due payroll taxes is before the 100% penalty has been assessed.