The Third Circuit recently affirmed a district court's opinion holding a corporation liable for payroll taxes embezzled by its payroll agent.
Pediatric Affiliates PA of New Jersey (Pediatric) hired PAL Data Processing Inc. (PAL) to handle its payroll needs. PAL's founder, Menachem Hirsch, would routinely send Pediatric a tax form that accurately calculated Pediatric's payroll taxes, and Pediatric would remit the funds to PAL. However, Hirsch would send only part of the payments to the IRS, keeping the rest. Hirsch engaged in the same procedures with more than 50 clients, embezzling more than $2 million. Pediatric learned of Hirsch's misappropriation in 2002, when it received IRS notification that it underpaid its payroll taxes for 1999 and 2000. Hirsch subsequently pleaded guilty to wire fraud and tax evasion and received monetary penalties and 37 months in prison. Pediatric also brought suit against PAL and Hirsch for fraud and won a $1.2 million judgment.
Meanwhile, the IRS initiated a levy against Pediatric's assets for the deficiency Pediatric claimed it was not liable for the deficiency or interest because it had paid the correct amount to PAL. A federal district court in New Jersey held for the IRS, and Pediatric appealed.
The Third Circuit cited the Supreme Court case of U.S. v. Boyle for the well-established principle that reliance on a third party does not excuse a taxpayer of its obligations. In addition, a taxpayer signs Form 8655, Reporting Agent Authorization, which states that the agency arrangement "does not relieve [it], as the taxpayer, of the...