Responsible Party Tax Liability
A responsible person penalty is assessed by the IRS for unpaid withholding taxes to anyone that might have had control over or decision ability as to whether withholding amounts should or could be paid.
These penalties can also be assessed against people that are not owners such as employees and also applies to directors and personnel of not-for-profit organizations.
A Trust-Fund Recovery or Responsible Party Penalty (“Penalty”) can arise when employers are required to withhold their employees’ share of Federal Social Security and income taxes from employees’ wages. The employer holds these withheld amounts in trust for the benefit of the United States. In order to ensure that the taxes are properly remitted, a penalty equal to the entire amount of the unpaid taxes can be assessed against any person required to collect, truthfully account for, and pay over any such tax or 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 or the payment thereof. Such person is considered a “responsible” party. This is in addition to other penalties provided by law.
A responsible party is a person(s) who has the duty and power to direct the collection, accounting, and paying of trust fund taxes. Such person may be:
- An owner, partner, member, shareholder, officer or an employee of a corporation, LLC, partnership or unincorporated business.
- A corporate director or shareholder.
- A member of a board of trustees or an employee of a not-for-profit or healthcare organization.
- Another corporation or third party payer.
- Payroll service providers.
- Professional employer organizations.
The penalty is imposed as a personal assessment equal to or up to 100% of the employment taxes that were withheld and not paid, or that should have been withheld. While the business or organization remains primarily liable for the employment taxes, the “responsible person” for which a penalty has been assessed can also be held liable. There can be multiple responsible parties and they each can be assessed the entire amount leaving the government able to collect from whomever they can get paid from first. In addition, this penalty is not dischargeable in bankruptcy.
The standards that the IRS and courts apply in these situations are quite broad. For instance, a person can be considered a “responsible person” if they had control over the organization but failed to exercise any control, or that they delegated the authority to an employee, or was even the victim of theft or embezzlement by an employee that resulted in the nonpayment. In such situations, even though there was no overt intention or willfulness to avoid payment, they would be held liable as a responsible party. In effect, the IRS is saying that you cannot delegate responsibility in these matters.
Neglecting to pay withholding taxes is a very serious matter and it is incumbent upon those in charge or working in organizations where the taxes are not paid to assure that they are, or to extricate themselves as quickly as they can from that organization. States also have trust fund penalties that include sales taxes and these can carry greater liability since interest and penalties can also be personally assessed in those situations. If you believe you work in an organization that is not remitting the full and proper withholding taxes, we recommend you seek professional advice as soon as you suspect it.
This blog was based on an article that originally appeared in the Withum Weekly Pulse, a publication of our Healthcare Services Group.
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