The IRS does pursue all taxes equally. The IRS is especially vigorous in going after payroll taxes withheld from wages that somehow don’t get paid to the government. The IRS calls it trust fund money that belongs to the government.
That makes any failure to pay—or even late payment—much worse.

In fact, that’s so regardless of how the employer or its principals use the money and regardless of how good a reason they have for not handing the money over to the IRS. When a tax shortfall occurs in this setting, the IRS will usually make personal assessments against all responsible persons who have an ownership interest in the company or signature authority over the company accounts.

How Does The IRS Expand Business Payroll Tax Liability To Individuals?

The IRS can assess a Trust Fund Recovery Assessment, also known as a 100-percent penalty, against every “responsible person.” The penalty is assessed under Section 6672(a) of the tax code, and the IRS uses it liberally. You can be responsible and therefore liable even if have no knowledge that the IRS is not being paid. If there are multiple owners, multiple officers, multiple check signers, they all may draw a 100% penalty assessment.

When multiple owners and signatories all face tax bills they generally squabble and do their best to sic the IRS on someone else. Factual nuances matter in this kind of mud-wrestling, but so do legal maneuvering and just plain savvy. One responsible person may get stuck paying while another who is even guiltier may get off scot-free.

If the IRS is going after individuals, the IRS will still try to collect from the company that withheld on the wages. The IRS also wants to make sure this kind of bad tax situation doesn’t occur again and the IRS wants to collect as much money as quick as possible from as many parties as it can get to.

Can The IRS Seek Criminal Penalties?

Sure they can and the government will typically seeks to enjoin this behavior. The following examples of recent criminal employment tax investigations show the trouble taxpayers can get into if they fail to properly withhold and pay over employment taxes.

Maryland Business Owner: 24 Months in Prison

In January 2013, Alphonso Tillman was sentenced to 24 months in prison and three years of supervised release for failing to account for and pay over employment taxes. Tillman was also ordered to pay restitution of $2,205,991. According to his plea agreement, Tillman was the president and sole owner of two companies that provided security guards to protect commercial and residential properties. Both companies withheld taxes from their employees’ paychecks, but Tillman failed to file the required forms or pay the payroll taxes due, with the exception of payments from IRS collection efforts. The total amount of taxes lost from Tillman’s failure to pay these taxes was $2,205,991. Tillman spent hundreds of thousands of dollars from the business bank accounts to cover his personal expenses between 2005 and 2008. “Using money withheld from your employees’ compensation for personal gain is reckless,” said Sheila Olander, acting special agent in charge, IRS Criminal Investigation, Washington Field Office. “Business owners are responsible to withhold and pay over income taxes from their employees’ compensation to the IRS. [This sentence] shows failing to do so is a serious offense to which Mr. Tillman is being held accountable” (U.S. Attorney’s Office, District of Maryland, Press Release, March 26, 2013).

Colorado Business Co-Owner: 28 Months in Prison

In September, Beth Ann Pettyjohn, of Englewood, Colo., was sentenced to 28 months in prison and three years of supervised release, and was ordered to pay $4,669,532 in restitution to the IRS, as well as a $25,000 fine. According to court documents, Pettyjohn, the co-owner and vice president of Overhead Door Co. of Denver, stopped paying over the payroll taxes withheld from employee wages, as well as the employer’s matching portion of FICA, totaling almost $4.7 million. Pettyjohn managed the accounting department, determined which bills would be paid, and issued and signed checks. She used the money to buy a number of houses, including paying $285,000 cash to purchase a condominium for her son. “Employers who fail to remit employment taxes are victimizing legitimate businesses by creating an unfair competitive advantage over those businesses that lawfully pay their share of employment taxes,” said Stephen Boyd, special agent in charge, IRS Criminal Investigation, Denver Field Office. “As this sentence demonstrates, there are real consequences for committing employment tax fraud” (U.S. Attorney’s Office, District of Colorado, Press Release, Sept. 12, 2013).

Nebraska Couple: Husband and Wife Both Get Prison Time

Michael and Laurie Russell, of Hickman, Neb., were sentenced to prison terms (16 months and six months, respectively) for failing to pay over employment taxes. The Russells were also jointly ordered to pay the IRS $311,486 in restitution. According to court documents, the Russells jointly owned and operated a window installation business, for which they withheld employee income and FICA taxes, but paid none of it to the IRS. The couple lived a comfortable lifestyle and could afford to pay the taxes, but apparently chose not to. “Business owners have a responsibility to withhold income taxes for employees and remit those taxes to the Internal Revenue Service,” said Sybil Smith, special agent in charge of IRS Criminal Investigation. “We are committed to pursuing those who violate the employment tax laws” (U.S. Attorney’s Office, District of Nebraska, Press Release, July 30, 2013).

Pyramiding Of Payroll Taxes

The practice the government was going after is sometimes called “pyramiding.” The DOJ noted that the company had made minimal payments of its tax debts, and that attempts to induce voluntary compliance failed. To stop the bleeding in a case like this, the Justice Department can seek an injunction to require a company and its principals to make timely tax deposits, to pay all withheld employment taxes, and to timely file all employment tax returns.

Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. Connect with me on TaxConnections.  We can discuss this topic or other tax matters.

Original Post By:  Jeffrey Kahn