March 9, 2016

Denver Tax Attorney   Who is Liable to the IRS for Unpaid Payroll Taxes?All companies are responsible for paying the payroll taxes of its W-2 employees. Payroll taxes are typically made of two parts: the employee’s portion—Social Security tax, Medicare tax, and income tax withholdings, and the employer’s portion— Medicare and Social Security taxes.

The employee’s total withholdings are referred to by the IRS as the “Trust Fund” amount of payroll taxes because the company is responsible for holding these taxes in trust for its employees. They are then to be paid over to the IRS. Ideally, these payroll taxes are to be deposited or paid over regularly.

But who is held liable when the company fails to pay its payroll taxes? While the answer may be dependent on the structure of the business, it is also important to know that the IRS seeks to hold responsible any individual who is willful and responsible for repayment.

For sole proprietorships or “Schedule C” businesses, owners are held completely liable for any unpaid payroll taxes. Owners or principals of sole proprietorships are accountable for the entire amount of the payroll taxes that are unpaid for their business.

In general, partnerships or businesses that are comprised of two or more partners but are not incorporated or not organized as a limited partnership or limited liability company, all partners are held liable for the partnership’s debts. This means that if a general partnership owes unpaid payroll taxes, any of its partners can also be held personally liable for the entire amount.

For corporations, limited partnerships and limited liability companies, liability for unpaid payroll taxes varies. According to federal law, the IRS may pursue collection against any “responsible persons” of the company when it comes to the Trust Fund portion of payroll taxes.

When determining whether an individual is considered to be a “responsible person,” the IRS looks at several factors—such as if the person has the authority to make financial decisions or to pay creditors on behalf of the company. The IRS also examines the individual’s duties and responsibilities, such as seeing see whether he or she can:

• Determine financial policies for the business
• Authorize or direct payments of creditors and bills
• Prepare, sign, review or authorize payroll tax returns
• Make or authorize federal tax deposits
• Authorize the assignment of electronic banking PINS or passwords

In many instances, the IRS Revenue Officer will summons the company’s bank records to identify which individual had the authority to sign checks during the period of time that the payroll taxes were unpaid.

If an individual is determined to be a responsible person, then the IRS examines whether or not the person failed to pay the payroll tax willfully. A failure to pay payroll taxes is considered willful if it is a conscious, voluntary, or intentional act as opposed to an accidental act.

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