Michigan

Avoiding the Trap of Personal Liability for Unpaid Federal Payroll Taxes

Tough economic times are upon us. Many businesses are finding themselves in difficult financial straights, and for some the unpaid bills are piling up. It is during times like these that many business owners and management officials are tempted to skip making their federal payroll tax deposits and use those funds for other purposes. The idea generally is that doing so will help the business get through a tough spot, and the payroll taxes will be paid back once the tough spot is receding in the rear view mirror.

While such a plan may make sense to a business owner or entrepreneur who is in a financial bind, it is a deadly trap that can lead to personal financial ruin. This is because under federal tax laws, any business that has employees automatically becomes a trustee for the government with respect to payroll taxes when it distributes its employees' pay checks. As far as the IRS is concerned, those tax funds belong to the government and it aggressively enforces collection of payroll taxes.

The bad news is that more than just the company be held liable for those taxes. In addition to the company, under Section 6672(a) of the IRS Code, every "responsible person" who "willfully" fails to have those taxes paid can be held personally liable for the payment of those taxes. Even worse, the IRS can collect the unpaid taxes from a responsible person without first attempting to collect the unpaid taxes from the company. This will include very steep interest and penalty assessments.

A person is categorized as a "responsible person" if they have ultimate authority over expenditure of a company's funds.

"Willful" failure to see to payment of payroll taxes basically means that the responsible person makes a deliberate choice to voluntarily, consciously, and intentionally pay other creditors rather than make tax payments. This includes situations where the responsible person deliberately or recklessly disregarded facts and known risks that the taxes were not being paid.

If a Michigan business owner or entrepreneur is facing a possible unpaid federal payroll tax situation, it is imperative that they immediately consult with a knowledgeable accountant or Michigan business lawyer who has experience with these issues in order to help them comply with their obligations under the IRS Code and avoid -- to the extent legally possible -- personal liability for any unpaid payroll taxes.

Full post as published by Michigan Business Lawyer Blog on October 08, 2008 (boomark / email).