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 an owner’s personal assets. This article is the first in a series discussing trust-fund liability taxes at the state and federal levels.
What Monies are Subject to Trust-Fund Liability?
Amounts subject to trust-fund liability consist of money withheld from an employee’s wages for the purposes of paying their income tax, social security, and Medicare taxes. An employer must withhold the money in trust on the government’s behalf until the funds are paid at both the federal and state level. The most common taxes subjected to trust-fund liability are taxes associated with employment, however, other types of taxes may be included, such as fuel taxes, sales taxes, and excise taxes.
Trust-Fund Liability at the Federal Level
At the federal level, an employer must pay withheld funds to the U.S. Treasury through the Federal Tax Deposit System. Internal Revenue Code §6672, known as the trust-fund recovery penalty or the “100% penalty,” subjects the individuals considered responsible for the collection and payment of withholding taxes to personal liability for the total amount of taxes that should have been withheld from employees. But, the IRS will only impose personal liability if two conditions are met: (i) the party can be held responsible for failing to withhold the taxes and (ii) the responsible party’s act leading to the failure to collect the taxes was willful. A responsible party’s act is generally considered willful when they know that the taxes are due and choose to use the funds for some other purpose. If the IRS believes that an individual is responsible, an IRS revenue officer will contact that individual to begin proceedings to collect the unpaid trust-fund liabilities. We will be discussing what it means to be willful and responsible under federal law in subsequent articles.
Trust-Fund Liability at the State Level
At the state level, Ohio trust-fund liability is far more stringent than its federal counterpart, removing the willful requirement, and imposing interest and penalties. Moreover, the failure of an employer to withhold or remit taxes on behalf of an employee does not relieve the employee from liability for the tax. But, Ohio does have a safe harbor provision, protecting employers whose failure to withhold was based on the employer's good faith reliance on an employee's statement as to his liability. Ohio Rev. Code §5747.07(E)(2).
Under Ohio Adm. Code §5703-7-15, any employee of a corporation having control, supervision, or the responsibility of paying the state trust-fund tax may be held personally liable for failing to do so. Subject to a few exceptions, this also extends to officers of the corporation who own more than 50% of the ownership interest in the corporation, regardless of any attempt to delegate responsibility. Under Ohio Rev. Code §5747.07, the law holds those officers and employees personally liable for the unpaid withholding tax liability, including penalties and interest. The Ohio Department of Taxation determines whether a person has control and supervision by examining a number of factors, so it is advisable that you consult with a professional in determining potential personal liability under state trust-fund liability taxes.
While this article addresses trust-fund liability generally, the next few articles will discuss personal liability for responsible parties at the state and federal level in more detail. 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.