A recent case in the Middle District of Florida provides an opportunity to remind business owners and upper level managers of their personal liability of payroll taxes that should have been withheld by the business and paid to the IRS. See In re Paris, Case No. 06-cv-1084, 2006 U.S. Dist LEXIS 73795 (M.D. Fla. October 10, 2006), although I will not focus on the particular facts of this case.
The general rule for personal liability for these taxes is —
Any person required to collect, truthfully account for, and pay over any tax imposed by this title 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, shall . . . be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. . . .
26 USC §6672(a). Thus, "Section 6672 imposes liability upon (1) a responsible person (2) who has willfully failed to perform a duty to collect, account for, or pay over federal employment taxes." Thosteson v. United States, 331 F.3d 1294, 1298 (11th Cir. 2003)."
In this case, the court noted some factors in finding that the party was responsible —
Thus, he had the authority to hire, fire and manage the employees of the corporation, had the authority to direct the payment of the corporation’s bills, and had the authority to determine the financial policy of the corporation. Appellant could negotiate on behalf of the corporation in its dealings with its suppliers, clients, and customers. He also had the authority to open and close corporate bank accounts, sign the checks of the corporation, and to make deposits and authorize deposits to the corporate bank accounts.
Once it is established that a taxpayer is a responsible person, he assumes the burden of proving lack of willfulness. George v. United States, 819 F.2d 1008, 1011 (11th Cir 1987).<!—-> Although the Supreme Court has ruled that Section 6672 precludes the imposition of trust fund recovery penalties without personal fault, the willfulness requirement of Section 6672 has been interpreted by courts to broadly encompass a range of actions by responsible persons. Id. (citing Slodov v. United States, 436 U.S. 238, 255 (1978)).<!—-> In Mazo v. United States, 591 F.2d 1151, 1155 (5th Cir. 1979),<!—-> the predecessor court to the Eleventh Circuit defined "willfully" as "meaning, in general, a voluntary, conscious and intentional act." It does not require a fraudulent or other bad motive on the part of the responsible person. Id. The willfulness requirement of Section 6672 is satisfied where there is evidence that the responsible person had knowledge of payments to other creditors after he became aware of the failure to remit withholding taxes. Smith v. United States, 894 F.2d 1549, 1553 (11th Cir. 1990).<!—-> Even if the responsible person is unaware that withholding taxes have gone unpaid in past quarters, one who becomes aware that taxes have gone unpaid in past quarters in which he was also a responsible person is under a duty to use all unencumbered funds available to the corporation to pay those back taxes. Thosteson v. United States, 331 F.3d 1294, 1301 (11th Cir. 2003).<!—->
In Paris, the individual who was the responsible party for the payment of taxes, filed an individual Chapter 7, and the Bankruptcy Court and District Court found that the trust fund penalties were excepted from discharge pursuant to 11 U.S.C. § 523(a)(1).
These cases are a warning to business owners, managers and other employees that meet the definition of "responsible party" to make sure that payroll taxes are collected and paid to the IRS. If you think you fall into this category, and you know taxes are not being paid, it may or may not make a difference that you personally are not the final decision-maker.