Most business owners have at least a basic understanding of their requirement to collect, remit, and pay employment taxes (payroll taxes). Payroll taxes are a “trust tax.” This means an employer holds, “in trust,” the amount of withheld taxes and then remits and pays the tax to the government on behalf of the employee. Payroll taxes, while an inevitable part of having employees can become complex (think multiple jurisdictional withholding, deferred compensation, and other more comprehensive situations). While employers, on occasion, fail to grasp the complexity of payroll taxes, there are professionals, who can help in better understanding your obligations or provide technical expertise in order to help navigate the complexities of payroll tax law.
Inevitably there will be times in your business when it is not achieving its full potential or is not in the preferred financial situation. However, when you find yourself in these types of situations, it is important to understand that not paying your payroll taxes should not be a consideration for your business. Willfully failing to pay your payroll tax obligation can lead to increased cost including penalties, interest, and personal liability. Under Section 6672(a) of the Internal Revenue Code, the IRS can assess a Trust Fund Recovery Assessment against any responsible person for unpaid payroll taxes. A responsible person is any officer, director, or an individual who makes decisions related to pay or has signature authority. An assessment under Section 6672(a) can be assessed against anyone who 1) is required to remit payroll taxes and 2) willfully fails to pay them. Its important to understand that willfulness is more than mere negligence. To mitigate the risk of willful behavior, a responsible person should have a 1) a reasonable belief that payroll taxes are being paid and 2) that belief should be reasonable based upon the facts and circumstances. A recent court case, out of the Federal Sixth Circuit Court of Appeals, illustrates the cautionary tale of a business owner who failed to catch the warning signs, willfully ignored the issue, and as a result, incurred personal liability for those failures.
In U.S. v. Hartman (2018), two individuals co-founded a company, Spectrum Tool & Design. One founder (Ott) was designated as the individual tasked with the management of the payroll tax obligations including working with a third-party company to help facilitate the process. The other founder (Hartman) had signature authority on the company accounts and signed employees checks but did not actively manage the payroll process. Initially, the company used a third-party to help facilitate the calculation of payroll taxes and then Ott would write the checks for payment of the payroll taxes. However, after the third-party became aware that Ott was not paying the payroll taxes they discontinued the relationship. Ott attempted to use a third-party software platform to assist in the payroll calculation process but continued to not pay the payroll taxes in spite of the employee’s continuing to be paid. Subsequently, Hartman became aware of the nonpayment but failed to take any corrective action to rectify the missed payments or take any action to facilitate the payment of payroll taxes. Eventually, the company went bankrupt so the IRS assessed the outstanding payroll tax obligation directly against Hartman, as a responsible person. Hartman, unsuccessfully, argued that he should not be held personally liable because he trusted his partner to handle the payroll taxes and was not directly responsible for payroll matters. However, the Court found that Hartman was a responsible person, knew of the issue, had the ability to act, and failed to do so.
While there are a number of cases with facts similar to this, it’s important not to think that this cannot happen to you or your business. This case is a cautionary tale of how “survival” of your business does not negate your obligations. It is important to remember these key points: 1) If you are a business owner, understand whether you are a responsible person; 2) If you are a responsible person but do not have direct oversight of the payroll process then make sure that you have at least some insight into whether or not the company is meeting its obligations; and 3) If you know that there are issues with your payroll tax