Temporary Relief Followed by Potential Liability for Employment Taxes
New York’s PAUSE Order aimed at mitigating the spread of COVID-19 unavoidably devastated business income. Because of that, NYS Dept. of Taxation and the Internal Revenue Service issued various forms of relief, including:
- deferring adverse collection activity
- extending filing deadlines
- abating late-payment penalties
- offering certain business tax credits
- extending payment-agreement deadlines
But the smoke will clear and the relief will expire. Taxpayers, both individual and business, will be expected to fully comply with all tax laws. “Responsible Persons” may be on the hook for businesses that failed to withhold or turn over employment taxes.
Duty to Turn Over Employment Taxes
With respect to employees’ wages, including income taxes, Social Security taxes, and Medicare taxes, we point to IRC § 6672, which imposes stiff penalties for those who willfully failed to turn over these taxes, held in trust, to the U.S. Treasury. The parallel New York statute is Tax Law §685(g).
Here’s IRS Form 4180 to understand what the IRS will ask to ascertain if you’re a Responsible Person against whom the dreaded Trust Fund penalty will be assessed.
Who is a “Responsible Person” of a Business?
A responsible person is one who has the duty to perform, or has the power to direct the act of colleting, accounting for, or paying over trust fund taxes.
The list of potential Responsible Persons is fairly long, and may include:
- Officer of a corporation
- Manager of an LLC
- An employee of a corporation or partnership
- A corporate director or shareholder
- A related controlling corporation or LLC
- An employee of a sole proprietorship
- A payroll service provider
- A lender, surety, or any other person with sufficient control over funds to direct the disbursements of funds
New York case law illuminates other factors that point to a Responsible Person:
- Whoever signed the corporate tax return
- Whomever is listed on the corporate bank account(s)
- Whoever had authority to sign checks
- Whoever maintained corporate books and records
- Whoever managed the business
- Whoever hired and fired staff
- Other managerial and financial authority over the business
The Trust Fund Recovery Penalty (TFRP) is a civil penalty resulting in a lower burden of proof than in a criminal proceeding. Since “willfulness” is a core requirement of this penalty, the IRS considers the following to determine willfulness on the part of the Responsible Person:
- knowledge of noncompliance
- prior, related notices sent by the IRS
- actions by the Responsible Person after actual knowledge of noncompliance
- presence of fraud or deception
- As to knowledge and willfulness, see Section V of IRS Form 4180.
We are still in the throes of the pandemic but with light at the end of the tunnel. While taxing authorities are monitoring the economic consequences, and potentially holding back on aggressive collections such as seizures and levies, we should consider the following relief measures:
- Modified Installment Agreements;
- Offers in Compromise for insolvent taxpayers, with separate OIC’s for trust fund assessments. It’s worth noting that the NYS Tax Department is a harsh negotiator and is accepting only the full tax portion of a tax liability even in light of economic hardship.
As with all tax matters, acting promptly is essential to staying out of trouble. Feel free to contact me for a consultation.
I would like the thank Christina Jonathan who wrote the New York Law Journal Article titled “Covid-19 Business Closures and Resulting Individual Tax Consequences.” Her article formed the basis of this article.