A common question from clients is whether you can face personal liability or criminal prosecution if your business does not comply with IRS rules. As an officer of a corporation, there are some situations where you might face personal liability for the actions of a business. These situations include crimes committed in your corporate capacity or in the name of the business that involve:
- Gross negligence,
- Intentional acts,
- Criminal acts, and
- Acts that fall outside a corporate officer's authority.
But when it comes to certain types of unpaid taxes, the IRS has broad jurisdiction to go after corporate officers or accounting department heads to recover money owed to the IRS.
Personal Responsibility for Not Paying Payroll Taxes
If a company fails to pay “trust fund” taxes to the IRS, corporate officers face explicit liability under the law. “Trust fund” taxes are the amounts an employer withholds from an employee's paycheck to pay to the IRS. Under current tax law, businesses must hold those amounts in trust to pay to the government. If a business fails to pay trust fund taxes, the IRS can hold anyone who has a duty to collect, account for, and pay the taxes responsible:
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, or willfully attempts in any manner to evade or defeat any such tax on 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. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
IRS Code § 6672(a) (1998). These unpaid taxes can include:
- Payroll taxes such as Social Security and Medicare taxes,
- Withholding taxes such as employee income tax,
- Sales and use taxes, and
- Related fines and penalties.
Who Can the IRS Hold Responsible?
Those that can be held responsible may include the CEO, chief financial officer, VP of accounting, a payroll supervisor, or anyone working in the accounting department. Specific job responsibilities will typically determine whether someone has a duty to act and liability for nonpayment. In determining liability, the IRS will consider an individual's:
- Ability to make financial decisions,
- Ability to write checks,
- Authority over other employees,
- Knowledge of the company's tax obligations and failures, and
- Responsibility to remit taxes.
If it is found that an employee or/and corporate officer was responsible to remit to the government payroll taxes and that individual failed to remit the payments to the IRS, the IRS can levy fines and penalties against them individually and seize their personal assets.
Get Help from Skilled Tax Attorneys
If you're facing an investigation or litigation for alleged noncompliance with IRS rules, you need the help of experienced tax professionals. The attorneys at Gabaie & Associates, LLC have decades of experience assisting clients with IRS issues, including resolving tax problems and litigation. Contact Juda Gabaie online for a free consultation or at 410-358-1300.