Can You Be Personally Liable for Unpaid Payroll Taxes?

Are You Personally Liable for Payroll Tax Debt?

Payroll tax debt is one of the most urgent tax liabilities a business can face. Not only can it affect a business’s ability to keep running, thanks to the Trust Fund Recovery Penalty, it can also result in personal liability for owners, shareholders, executives, and anyone else with financial responsibility for the business.

If your business has fallen behind on payroll tax filings or you’ve received a notice from the IRS mentioning the trust fund recovery penalty, take action to limit your personal liability risk. Call BestTaxPro™, LLC at 763-477-4205 to discuss employment tax concerns and learn more about shielding your assets.

Key Takeaways

• The TFRP applies to any responsible person – You don’t need to be the owner to be held personally liable for unpaid payroll taxes.
• IRS Form 4180 interview – The IRS uses these interviews to identify who’s liable for the TFRP.
• Responsible person risk factors – Control over finances, check-signing authority, and a job description that indicates financial responsibility.
• Tax levies – After assessing the TFRP, the IRS can seize personal assets via levies to cover the penalty.
• Professional tax guidance is recommended – A tax pro can explain your options if you’re under IRS investigation for being a responsible person.

What Is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty (TFRP) is the penalty the IRS applies to individuals responsible for a business’s nonpayment of trust fund taxes. Trust fund taxes are taxes that a business withholds from an employee’s paycheck, including income and FICA taxes.

A business is legally obligated to hold trust fund taxes in trust until they can be remitted to the government. If the business uses that money for any other reason, the IRS views this as a mishandling of money that never belonged to the business in the first place. This is why, if the IRS can’t recover the unpaid payroll taxes from the business directly, the IRS will go after the individuals responsible for the nonpayment and hold them personally liable for the tax debt.

The amount of the TFRP is equal to 100% of the past-due payroll tax debt. If the responsible individual can’t pay it immediately, they must make other arrangements to pay it, just like any other personal unpaid tax balance. If they don’t, the IRS can use all of its collection tools to secure payment, including wage garnishment, asset seizure, and liens.

Even if a business dissolves or files for bankruptcy, the TFRP remains. It’s very difficult to eliminate once assessed.

Who the IRS Considers a Responsible Person

Before assessing the TFRP, the IRS must first identify one or more responsible persons. The IRS defines a responsible person as someone who owns, controls, or has effective control over a business’s finances. The person or people they ultimately hold accountable must also have willfully failed to pay the tax debt in question.

This means that it’s not just whoever owns the business or handles tax payments that could be liable for the TFRP. The person named must both be responsible for making payments for the business and have the discretion to decide which bills are paid and when.

Consider, for instance, someone who technically makes all payments for the business by logging in to an online account and scheduling payments. However, they don’t actually decide which bills are paid or when. Instead, they operate under the direction of someone higher up in the business. This hypothetical individual would likely not be considered a responsible party for TFRP purposes.

There’s no exhaustive list of positions that identifies potential responsible persons. This is because someone’s job duties and responsibilities decide TFRP liability, not job titles. That said, there are positions within businesses that pop up frequently within the TFRP realm, including:

• CEO/CFO
• Payroll Service Providers (PSPs)
• Bookkeeper/accountant
• Partner
• Human resources manager
• Payroll manager

If someone has control over a business’s financial decisions, the power to disburse funds, and payment authority on a business account, they will likely be deemed a responsible party by the IRS

Signs You’re at Risk of TFRP Assessment

Once a business falls behind on payroll tax deposits and makes no effort to catch up or address the issue with the IRS, it’s only a matter of time until the IRS begins trying to identify a responsible party. The IRS often names multiple responsible parties who are jointly and severally liable for the entire amount. There are several signs that may indicate you’re being considered:

• You receive a Form 4180 interview notice.
• You have or had check-signing authority for the business.
• You held a management role during the non-payment period.
• You knew the taxes were due and unpaid, but did not take action to rectify the situation.

How the IRS Investigates: Form 4180 Interview Process

During the investigation, the IRS attempts to interview all potentially responsible persons. The goal is to figure out the scope of each person’s employment to determine whether or not they were responsible for paying taxes. The IRS also wants to find out if someone knew or should have known that payroll taxes were not being deposited.

The IRS may ask a variety of questions to make a final determination, including inquiries relating to who:

• Had a particular job title, job description, and actual day-to-day responsibilities.
• Decided which bills were paid and when.
• Had authority to sign checks or had access or business bank accounts.
• Knew the trust fund taxes were delinquent.
• Conveyed concerns about taxes to owners or management.
• Paid other bills after finding out taxes were unpaid.

If you’re faced with the possibility of a penalty worth tens or hundreds of thousands of dollars, it’s easy to say the wrong thing. However, there’s something that works to your benefit.

During your interview, if you state that you want to consult with an authorized representative, the investigator will suspend the interview and allow you to seek further guidance. By working with a licensed tax professional, such as an enrolled agent, throughout this process, you can protect yourself from unintentionally saying something that unfairly paints you as a responsible party.

In addition to the interviews, the IRS will also go through the business’s financial documents to find relevant evidence, and in many cases, that evidence can be used against you. The IRS may look into:

• Bank signature cards
• Job descriptions
• Payroll provider logs
• Internal memos
• Email chains
• Management letters and instructions
• Meeting minutes
• Vendor payment approvals

It’s easy to spin certain pieces of evidence against you. For example, if you were copied on an email about payroll delinquency, the IRS may argue that you were willful–even if you know that you had no power to make financial decisions. If the IRS decides to assess a TFRP against you, they’ll send Letter 1153 and Form 2751 – it’s critical to get representation if you receive those notices.

Common Misunderstandings

Some people don’t fully understand the serious danger they face when they are under investigation as a potential responsible party. This isn’t something you can get out of by telling the IRS they’ve misunderstood your job role. You need strong evidence proving that you can’t be considered a responsible party. Let’s break down a few of the things people think will automatically get them out of the TFRP, but often won’t.

“I Didn’t Own the Business”

The business owner is not the only person who can be held personally responsible for the TFRP. There are many other decision makers and people with authority whom the IRS can hold responsible.

“I Just Did What I Was Told”

That doesn’t excuse actions that the IRS will view as the willful non-payment of payroll taxes. If you had the ability and knowledge to pay the past-due taxes, they may consider you a responsible party.

“I Wasn’t the Bookkeeper”

Business tax issues go far beyond the party that actually files the tax paperwork or keeps track of billing.

“The Business Is Closed and Has No Assets Left”

Personal liability for the Trust Fund Recovery Penalty survives a bankrupt or closed business.

Why You Should Act Now

If you’ve received a notice from the IRS or you’ve been asked to attend a 4180 interview, you’re already under investigation. The IRS won’t stop until it finds one or more people responsible for the TFRP. The longer you wait to address your options with the help of a tax professional, the fewer options you have. Statements you give the IRS may lock you in as a liable party, or the IRS may complete their investigation before you’ve had a chance to defend yourself.

Waiting too long also puts you at risk of a final assessment, which triggers the collections process. You could have a lien placed on your assets, your wages garnished, or your assets seized.

Should your case go to Tax Court, having as much preparation time as possible is critical. That’s why working with a tax professional with USTCP (United States Tax Court Practitioner) credentials gives you a significant advantage when fighting the TFRP. Should your case escalate, having an experienced USTCP in your court can make a significant difference in the outcome.

How BestTaxPro™ Helps Protect You

BestTaxPro™ clients are represented by Joshua Webskowski, Enrolled Agent and USTCP. As an Enrolled Agent, he can represent you before the IRS anywhere in the country. As a United States Tax Court Practitioner, he can argue your case in Tax Court, challenging the IRS’s decisions.

If the IRS has decided to interview you to determine whether or not you’re a responsible party, Joshua can help you prepare for your interview. During interview prep, he’ll explain the purpose of each question the IRS asks and the risk that comes with how each question is answered. You’ll learn how to avoid statements that can be misinterpreted and help you give only the information that the IRS is asking for.

There are a few different strategies Joshua may consider when defending you against a TFRP assessment. First, he may challenge responsibility. If you lacked financial authority, weren’t part of the decision-making process, or had solely administrative job duties, the IRS may not be able to justify the assessment.

Second, he can also challenge the IRS’s determination of willfulness. If you were unaware of the delinquent taxes, took steps to rectify the issue once you were made aware of it, or didn’t prioritize other bills at the expense of IRS deposits, it can be very challenging for the IRS to claim that you were willful in non-payment.

If the IRS does assess the penalty, we’re here to help you find the best way to resolve your tax debt. Options include installment agreements, partial payment installment agreements, currently not collectible status, or (in limited cases) offers in compromise.

If you’re concerned about being labeled a “responsible person” for payroll tax debt–and you should be if you are under investigation–it’s time to talk to a tax professional. Early representation can give you a significant advantage and help you get ahead of the IRS during the investigation. Call BestTaxPro™ at 763-477-4205 or contact us online to schedule a confidential consultation about your next steps.