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The U.S. looks very unfavorably on employee withholding taxes that are not paid over to the IRS. Code Section 6672 is an important tool in the IRS' compliance arsenal. Under Section 6672, an individual who is responsible for the collection of the taxes can be held liable for a 100% penalty if collected taxes are not paid over.

Employers often use employee leasing companies to assist them with their staffing needs and payroll responsibilities. These employers effectively lease their employees from the leasing company. The leasing company typically pays the employees (after collecting payroll amounts from the company where the leased employees actually do their work), and collects and pays over the withholding taxes to the IRS. As a matter of common law, the employees are usually not "employees" of the leasing company since the company does not direct and control the employees in their work.

If the employee leasing company does not pay over the withholding taxes to the IRS, can an officer or responsible person of the leasing company be held liable for the 100% penalty? Yes, according to a recent IRS Office of Chief Counsel Memorandum.

In the Memorandum, the employee leasing company was reporting the employees as their own on their employment tax returns, and not as employees of the company where they physically worked. Due to this reporting, the Memorandum concludes that they will be treated as employees of the leasing company, and thus responsible officers of the leasing company can be personally liable for the 100% penalty if the leasing company withholds but does not remit withholding taxes.

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