WHAT HAPPENS WHEN A CORPORATION DOES NOT PAY THEIR PAYROLL TAXES?

When a corporation has unpaid payroll taxes, those who are responsible for the payment of the tax will be held personally responsible for 100% of the employee share of the tax.  This is called Trust Fund Recovery Penalty.  A responsible person is defined as a person who (1) is aware of the payroll tax liability, (2) has the ability to pay the tax and (3) acted willfully not to pay, regardless of the reason.  This “Penalty” will be assessed when it is determined the corporation is either unwilling or unable to pay the tax. The person could either be an officer, board member or even the bookkeeper.

In most cases the IRS will assume all officers and board member are responsible persons [regardless of the facts and circumstances] and will automatically assess 100% of the trust fund penalty against each officer and board member.  Generally an officer or board member will need to go to court to show they are not a responsible person.  Except in bankruptcy proceedings, before the individual is eligible to go to court they first need to pay the Trust Fund Penalty, and then sue in court for a refund.

An example of this is in the court case of Skoczylas v. the U.S. [Skoczylas v. USA, 09 Civ. 2035 (ILG) (RML), NYLJ 1202582026679, at *1 (EDNY, Decided December 3, 2012)].  The IRS automatically assessed the Trust Fund Penalty against a board member but in court was denied summary judgment and awarded the board member a refund.  Even though the individual was a director of the corporation, material fact issues remained as to whether she was responsible person who acted willfully with regard to corporation’s tax debts. Although she was director, she didn't manage corporation’s day-to-day affairs and lacked decision making authority over paying debts even though she had some check-signing authority.  In addition it was unclear as to whether creditors ran the corporation during bankruptcy and/or if she had actual control over the checkbook and bank accounts.  It was also undisputed that the CEO was a responsible person who acted willfully.

Please contact this office if you have any questions or need assistance.