A Failure to pay Payroll Taxes is a Risky Proposition
Erwin v. US (January 13, 2010, see link below) is a recent case coming out of the US Court of Appeals for the Fourth Circuit, and happens to be a case originating in North Carolina. The Case discusses what some believe is a well established rule. In fact, many might read the case and find nothing new at all. The result by the Court was to once again find personal liability on an individual for payment of payroll taxes not paid by a Company that the taxpayer held an ownership interest in. The Court set forth, in great detail (see opinion link below), the facts upon which Mr. Erwin claimed that he should be given special consideration, and not held personally liable for payment of the payroll taxes in question. One can read the text of this opinion and somewhat sympathize with Mr. Erwin’s position. He had hired what he thought was a reputable firm to handle payment of these taxes, and found out that they were not so reputable after all (or at least quite incompetent as it related to the details of payment of taxes). He had given this outside firm specific instructions to use Company funds to pay payroll taxes, however these instructions were not adhered to. Mr. Erwin even took funds out of his own pocket and delivered them to this outside firm for the payment of payroll taxes, but this request was not fully complied with either. After finally firing this firm, there is additional incontrovertible testimony that monies of the Company were paid for lease rents and other expenses, while payroll taxes remained due and unpaid.
I recommend this case as a guide for your Company, and for those employees in your Company who may become personally liable for unpaid payroll taxes if the worst case scenario should occur. This case goes through, in some detail, the requisite factors for personal liability for payroll taxes. Basically, personal liability will extend to anyone who is (1) responsible for collection and payment of the taxes, and (2) willfully fails to see that the taxes are paid. The Court goes into some detail to show that the category of responsible persons is actually quite broad within a Company, and “willfulness” in failure to pay is more easily achieved than one might expect. The Court provides in the text of this case the full list of the factors that are to be considered in determining whether a person is responsible. Willfulness was found by the Court simply due to the fact that the Company had paid these monies (which are held in trust) for other debts and liabilities of the Company.
The bottom line here for our clients is that we cannot strongly enough encourage you to understand that at the point payroll is calculated, all payroll taxes due to the government are held by the Company in trust, and in a fiduciary capacity. These funds must be turned over to the government, and cannot and should not, be used for any other Company purpose. To do so is very risky as the Court has made it clear that there is not likely “reasonable cause” to do otherwise. Further, delegation of the duty of payment to employees or outside vendors is done at your own peril, so choose wisely. A quick read of the case (link below) can really give the reader some idea of the seriousness of proper application of withholding taxes.
http://pacer.ca4.uscourts.gov/opinion.pdf/081564.P.pdf
Tom Grella
Subscribe