You may be
aware that bad things can happen if an employer fails to remit payroll taxes
withheld from employees’ paychecks. There are generally three federal payroll
taxes involved when discussing payroll and withholding:
(1) Federal income taxes withheld
(2) FICA taxes withheld
(3) Employer’s share of FICA taxes
The first
two are considered “trust fund” taxes. They are paid by the employee, and the
employer is merely acting as agent in their eventual remittance to the IRS. The
third is the employer’s own money, so it is not considered “trust fund.”
Let’s say
that the employer is having a temporary (hopefully) cash crunch. It can be
tempting to borrow these monies for more urgent needs, like meeting next week’s
payroll (sans the taxes), paying rent and keeping the lights on. Hopefully the company can catch-up before too
long and that any damage is minimal.
I get it.
The IRS does
not.
There is an
excellent reason: the trust fund money does not belong to the employer. It is
the employees’ money. The IRS considers it
theft.
Triggering one
the biggest penalties in the Code: the trust fund penalty.
We have in
the past referred to it as the “big boy” penalty, and you want nothing to do
with it. It brings two nasty traits:
(1) The rate is 100%. Yep, the penalty is equal to
the trust fund taxes themselves.
(2) The IRS can go after whoever is responsible,
jointly or severally.
Let’s expand
on the second point. Let’s say that there are three people at the company who
can sign checks and decide who gets paid. The IRS will – as a generalization –
consider all three responsible persons for purposes of the penalty. The IRS can
go after one, two, or all three. Whoever they go after can be held responsible
for all of the trust fund taxes – 100% - not just their 1/3 share. The IRS
wants its money, and the person who just ponied 100% is going to have to
separately sue the other two for their share. The IRS does not care about that part
of the story.
How do you
defend against this penalty?
It is tough
if you have check-signing authority and can prioritize who gets paid. The IRS
will want to know why you did not prioritize them, and there are very few
acceptable responses to that question.
Let’s take a
look at the Myers case.
Steven Myers
was the CFO and co-president of two companies. The two were in turn owned by
another company which was licensed by the Small Business Administration as a
Small Business Investment Company (SBIC). The downside to this structure is that the SBA
can place the SBIC into receivership (think bankruptcy). The SBA did just that.
In 2009 the
two companies Myers worked for failed to remit payroll taxes.
Oh oh.
However, it
was an SBA representative – remember, the SBA is running the parent company –
who told Myers to prioritize vendors other than the IRS.
Meyers did so.
And the IRS
slapped him with the big boy penalty.
QUESTION: Do you think Myers has an escape, especially since he was following the orders of the SBA?
At first it
seems that there is an argument, since it wasn’t just any boss who was telling
him not to pay. It was a government agency.
However, precedence
is a mile long where the Court has slapped down the my-boss-told-me-not-to-pay
argument. Could there be a different answer when the boss is the government itself?
The Court
did not take long in reaching its decision:
So, the narrow question before us is whether …. applies with equal force when a government agency receiver tells a taxpayer not to pay trust fund taxes. We hold that it does. We cannot apply different substantive law simply because the receiver in this case was the SBA."
Myers owed
the penalty.
What do you
do if you are in this position?
One
possibility is to terminate your check-signing authority and relinquish decision-making
authority over who gets paid.
And if you
cannot?
You have to
quit.
I am not
being flippant. You really have to quit. Unless you are making crazy money, you
are not making enough to take on the big-boy penalty.
