Employer liable for Sec. 6662 penalties for failure to deduct and pay wage taxes.

• Author: Everidge, Kathryn L.
• Position: Internal Revenue Code section 6662

In Abbey Carpet, 9/26/97, the Court of Federal Claims held that an employer was liable for the negligence penalty under Sec. 6662 for the failure to withhold taxes on employee wages. The court found that the employer was a taxpayer and that Form 941, Employer's Quarterly Federal Tax Return, was a return for Sec. 6662 purposes.

Abbey Carpet did not deduct and withhold taxes on wages paid to its employees for tax years 1991 through 1993. Although the employees paid their taxes, the IRS assessed a 20% Sec. 6662 negligence penalty against Abbey. Abbey paid the penalty and sued for a refund, arguing that Sec. 6662 did not apply to an employer who failed to deduct and withhold employee taxes.

Sec. 6662(a) imposes a 20% penalty on "any portion of an underpayment of tax required to be shown on a return." An underpayment subject to penalty is defined as an underpayment of tax attributable to "negligence or disregard of rules or regulations."

Sec. 3402 requires employers to deduct and withhold taxes on employee wages in accordance with certain procedures. Sec. 3402(a)(1) requires that amounts deducted and withheld be deposited with the government and Sec. 3403 holds the employer liable for payment of the tax required to be deducted and withheld under this chapter (Chapter 24, Collection of Income Tax at Source).

Abbey Carpet argued that Sec. 6662 did not apply because employee taxes withheld by employers were not "taxes required to be shown on a return" of the employer. The taxpayer also argued that, while the Form 941 was a return that required taxes to be shown' it was not a return subject to Sec. 6662, because Sec. 6662 imposes penalties on taxpayers themselves and not on an employer acting as a collection agent.

Regs. Sec. 1.6662-3 states that a penalty will apply to any portion of an understatement of any income...