The 100% penalty.

• Author: Wadhwa, Darshan L.
• Position: Withholding tax payment failure penalty

"Responsible Persons" Can Be Held Liable for Their Companies' Failure to Collect and Pay Over Tax

Congress enacted the 100% penalty statute, Sec. 6672, to encourage the immediate payment of amounts withheld from employees by giving the IRS the authority to hold responsible third parties personally liable if their companies do not pay these taxes. The IRS need not file a suit first against the company; it may take direct action against the responsible persons. Therefore, the person responsible for the collection and payment of withholding taxes cannot avoid the 100% penalty by asserting that the IRS made no attempt to collect the taxes from the corporation that employed him.(1) The liability of the person responsible for payment of the taxes is distinct from the corporation's liability and may be asserted by the IRS without first attempting to collect from the corporation.

Once the penalty has been assessed under Sec. 6672, the burden of proof falls on the taxpayer to prove that he was not a responsible person or his failure to pay the taxes was not willful.

Trust Fund Taxes

"Trust fund taxes" include the employee's portion of Federal income tax withheld from the employee and FICA collected from the employee. These taxes do not include the employer's matching portion of the taxes.

If a corporation or partnership fails to pay the withheld taxes to the Government, the 100% penalty may be assessed against the agent of the employer who is the responsible person and who willfully failed to collect and pay over these taxes to the Government. The amount of the penalty is equal to the trust fund portion of the taxes. Note that sole proprietorships are responsible for the total amount of taxes (the employer's portion as well as the employee's portion) plus any applicable interest and penalties.

The 100% penalty is not assessed in the same way as income or estate and gift tax: The IRS never issues a Statutory Notice of Deficiency; the Tax Court has no jurisdiction over employment and withheld income tax cases; and the Appellate Division is the only level of administrative review. Once the penalty is imposed, the IRS has the same rights to collect the penalty as it would be collect any other taxes from the taxpayer. The IRS also has the power to file liens and seize assets from the taxpayer. Any person who pays such a penalty may sue the company under Sec. 6672 to recover the amounts paid.

Responsible Persons

Sec. 6671(b) defines a responsible person as "an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs." Various court cases have determined that Sec. 6671(b) includes any person who has all or part of the power of making decisions as to which liability will be paid and which debt will not be paid. The courts have established that a responsible person is one who has the final or significant word as to which bills or creditors should be paid and when.(2) The "final word" does not mean "exclusive" control but "significant" control.(3)

To be deemed a responsible person, that person is not required to prepare the tax returns, pay wages or withhold taxes and keep the books and records. Rather, over the years the courts have considered the following factors in determining who is a "responsible person."

* The ability to sign checks.(4)

* Preparation of employment tax returns.(5)

* Service as an officer, director or shareholder of the corporation.(6)

* The authority to hire and discharge employees.

* An entrepreneurial stake in the corporation.

* Corporate officers and employees

The major factor in determining the responsible person is to find out who has control over company finances for seeing that the taxes withheld are remitted to the IRS. Such a duty is found in "high corporate officials charged with general control over corporate business affairs who participate in decisions concerning payment of creditors and disbursal of funds."(7)

Seitz(8) is an important case in this area because it specifically identifies the "responsible person" and defines his responsibility. George Seitz had his inventory of automobiles financed by a bank; because his dealership was in financial difficulties, the bank kept a representative at the dealership Seitz made out checks to the IRS but the bank representative did not forward the checks to the Service. The court ruled that Seitz had the responsibility of writing the checks and for following through to ensure that the IRS received the payments.

The IRS may assess the penalty against more than one responsible person. Generally, the IRS will not collect more than 100% of the tax liability, but occasionally it will make an error and collect more than the assessed amount from the responsible persons. In any event, if the Service has collected more than 100% of the tax liability, a...