The IRS is stepping up enforcement and collection of unpaid employment taxes. The federal government derives approximately 70% of its revenues from employment taxes: FICA, Medicare, and income tax withholdings from wages. These withholdings are referred to as trust fund taxes, because the business is holding the funds in trust for the government until timely remitted. While the business is primarily responsible for collecting and remitting these taxes, the Internal Revenue Code (IRC) adds teeth via IRC 6672 and IRC 7202.
IRC 6672 imposes a penalty equal to 100% of the unpaid trust fund taxes against any person who is determined to be both willful and responsible. This effectively prevents anyone from standing behind a corporate, LLC, or any other type of shield for protection against assessment.
IRC 7202 adds that any person who fails to pay the trust fund taxes is guilty of a felony; and, if convicted, will be fined up to $10,000 or sent to jail for up to 5 years.
A responsible person is anyone who has the authority, whether that person exercises it or not, to pay the trust fund taxes, or direct others to pay them. Typically, officers and those with check signing authority are deemed to be responsible unless they can prove otherwise.
A willful person is a responsible person who knows, or should know; a tax liability exists but nonetheless does not act to pay over the taxes. A business owner is expected to exercise due care. Furthermore, claiming “I didn’t know” is not a valid defense in all but the most unusual of circumstances.
Because of the seriousness that the IRS ascribes to the nonpayment of trust fund taxes, all business owners and anyone working for a business in a discretionary capacity must be cognizant of these rules, take steps to routinely verify that there are no delinquent taxes, and swiftly act if a problem is discovered.
For further information about this matter, or to discuss your specific situation, please contact Aronson’s Larry Rubin, CPA, at 301.222.8212.