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April 27, 2018

Trust-Fund Liability at the Federal Level: Who Does the IRS Consider to be a Responsible Person?

    As tax attorneys in Columbus, Ohio, Nardone Limited routinely advises taxpayers about their potential personal liability relating to liabilities owed by a business as part of our tax controversy work. When an IRS revenue officer contacts you or your business, it is important that you understand your rights and obligations. The IRS has broad authority and tools available to collect delinquent taxes, including conducting a trust-fund investigation of responsible persons. Most companies operate as a business entity that shields owners from personal liability for the company’s obligations. But, a major exception exists to this rule, commonly referred to as trust-fund liability. If an employer fails to pay certain taxes on behalf of their employees, the IRS and the Ohio Department of Taxation have the right to collect monies due from a responsible party’s personal assets. This article focuses on trust-fund liabilities at the federal level and is part of Nardone Limited’s series discussing trust-fund liability at the state and federal levels. See our prior articles relating to a responsible person’s potential liability in Ohio, including: (i) Personal Liability for Business’s Failure to Pay Ohio Sales Tax and (ii) Business Owners are Not Always Responsible Parties under Ohio Law relating to Sales Tax Liabilities.

What is the purpose of trust-fund liability?

    The Internal Revenue Manual discusses the liability of third parties for unpaid employment taxes, also known as trust-fund liability. The purpose of trust-fund liability is to encourage employers to pay withheld employment and income taxes by making any responsible person personally liable for 100% of any unpaid trust-fund taxes. To do so, the Internal Revenue Code (“IRC”) authorizes the IRS to collect the monies due from a person who may otherwise be shielded from liability. These otherwise-protected people only become liable, however, if they were both willful and responsible in the nonpayment of the trust-fund liability taxes as described in IRC §6672. This article focuses on who is considered a responsible person. A follow-up article will discuss the willfulness requirement.

Who may be deemed responsible?

    The IRS’s definition of a responsible person is broad and inclusive, and may include anyone responsible for collecting, accounting, and paying the taxes to the government. Responsible parties often include corporate officers and directors, partners, and employees, but may also extend to bookkeepers, accounting firms, parent companies, creditors, and purchasing companies. Because the definition is so expansive, courts often consider a variety of factors based on the facts and circumstances of each case. Factors often looked to by courts include:

  • Authority to sign checks;
  • Identification of the person as an officer, director, or principal shareholder of the corporation, a partner in a partnership, or a member of an LLC;
  • Duties of the officer as set forth in the by-laws;
  • Identification of the person as the one in control of the business’s financial affairs;
  • Authority to determine which creditors the company would pay and individuals who exercised that authority;
  • Authority to control payroll disbursements;
  • Whether the individual had authority to sign, and did actually sign, employment tax returns; and,
  • Authority to pay the taxes owed.

    See IRM 5.17.7.1.2; citing Cook v. United States, 52 Fed. Cl. 62, 89 AFTR2d 2002-1541, 2002-1 USTC ¶ 50,328 (Fed. Cl. 2002)(holding that the controlling shareholder and president were personally responsible for unpaid employment taxes); Datlof v. United States, 252 F. Supp. 11, aff’d, 370 F.2d 655 (3rd Cir. 1966)(finding that the president and treasurer, who had control over corporation's financial affairs, could be held personally liable for the corporation’s failure to pay withholding and employment taxes collected from employees’ wages); and Purcell v. United States, 1 F.3d 932, 937 (9th Cir. 1993)(holding that a company president could be deemed a responsible person for failing to pay withholding taxes). While no one factor is determinative, courts have been more likely to hold secondary sources, including responsible persons, with the ability to pay the taxes personally liable for the unpaid trust-fund taxes.

How much will the IRS attempt to recover?

    Generally, the IRS only attempts to recover the unpaid balance of the trust-fund tax. The amount is typically based on the unpaid income taxes that were required to be withheld by the employer, plus the employee’s unpaid portion of FICA taxes. While the IRC’s sections on trust-fund liability do not expressly provide for any additional penalties or fees, the IRS is permitted to pursue additional fines and penalties under other sections of the code. See IRC §6672. Thus, if you are concerned about your potential liability or have been contacted by an IRS revenue officer, it is highly recommended that you consult with a professional to discuss further.  

Contact Nardone Limited

    Nardone Limited frequently represents individuals and businesses in federal, state, and local civil tax matters, including appeals. If you or your business have been contacted by an IRS revenue officer or the Ohio Department of Taxation, or are struggling with tax liabilities, you should contact one of our tax attorneys today. We will thoroughly review your case to determine your potential personal liability, as well as what options and alternatives are available to you.

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« Business Owners Are Not Always Responsible Parties under Ohio Law Relating to Sales Tax Liabilities | Main | Trust-Fund Liability at the Federal Level: The Willfulness Requirement »

April 27, 2018

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