Beware the Payroll Tax Trust Fund- Penalty

When a company fails to remit payroll taxes, the IRS may impose personal liability on certain “responsible persons,” including certain shareholders, partners, officers, and employees. Under Internal Revenue Code Sec. 6672(a), the so-called “trust fund” penalty — which is equal to the total amount of tax that should have been remitted — is imposed on “any 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 . . . .”

The IRS is liberal in its interpretation of who is a responsible person and what constitutes a willful failure to collect and remit payroll taxes. A responsible person can be anyone — inside or outside the company — with significant control or influence over the company’s finances by virtue of ownership interest, title, check-signing authority, authority to hire and fire, control over payroll, or power to make federal tax deposits. Delegating the duty to handle payroll taxes is not enough to avoid liability — there may be several responsible persons within a company. And “willful” failure includes “reckless disregard” of obvious or known risks of nonpayment. (It does not, however, apply to one who, through negligence, is unaware of a payroll tax default.)

Case in Point

A recent federal case — U.S. v. Hartman (U.S. District Court, E.D. Mich, 7/26/17) — illustrates the dangers of the trust fund penalty. In that case, the CEO and 50% co-owner of a corporation was held personally liable for the corporation’s unpaid payroll taxes, even though the other co-owner and chief operating officer (COO) handled the payroll taxes.

The CEO was a responsible person because of his title, ownership interest, check-writing authority and power to fire the COO. Indeed, the CEO did fire the COO for performance issues yet inexplicably continued to rely on him to pay the payroll taxes. The court found that the CEO’s failure was willful because he continued to place his trust in the COO even after becoming aware of the COO’s “fishy accounting” and failure to remit payroll taxes — a reckless disregard of obvious or known risks.

Consider a CPEO

Companies seeking to ensure that they fulfill their payroll tax obligations and avoid trust fund penalties against responsible persons should consider using a certified professional employer organization (CPEO). Many companies use professional employment organizations (PEOs) to handle a variety of employment-related administrative tasks, including payroll taxes. But using a PEO does not relieve an employer of the ultimate responsibility for payroll taxes and liability for failure to collect and remit them.

Pursuant to federal legislation enacted in late 2014, the IRS has established a process for PEOs to become certified as CPEOs. Unlike a PEO, a CPEO is treated as the employer of its customers’ service providers and, therefore, is solely responsible for their payroll tax obligations. In other words, companies can shift their payroll tax liabilities to the CPEO.

You can find a list of CPEOs at https://www.irs.gov/tax-professionals/cpeo-public-listings.