Responsible parties are often placed in incredibly difficult and fraught situations when payroll tax mistakes are discovered. On the one hand, responsible parties will come to understand that they can be held personally liable for payroll tax failures when certain factors and conditions are present. Furthermore, the business owner may come to understand that loans made to the business to continue operations may have unintended and unexpected tax consequences. However, on the other hand, a company’s ability to operate can be significantly constrained by cash flow issues created by outstanding payroll tax obligations.
Thus, a business owner may face an array of difficult decisions regarding how to approach the aftermath of a bookkeeper’s or another employee’s payroll tax failures. Working with a Tax Lawyer can help business owners make informed decisions throughout the process to mitigate the potential consequences the face. To schedule a confidential and reduced rate initial payroll tax consultation, please call the Los Angeles or Irvine Law Offices of David W. Klasing at 800-681-1295 or schedule online Here.
Dr. McClendon founded Family Practice Associates of Houston, a medical-services provider, in 1979. The practice was successful and apparently highly profitable for the doctor. Court documents seem to indicate that the business did not experience any major hardships in its first decade and a half of operation. However, in 1995, the practice hired a CEO who would later plead guilty to three counts of felony theft of money. It wasn’t until 2009 that the doctor learned that his practice had incurred greater than $10 million in back payroll taxes.
Following the discovery of this fact, the practice temporarily stopped its operations and remitted all remaining accounts receivable to the IRS to partially satisfy the employment tax obligation. The doctor made a $100,000 loan to the business to cover existing payroll obligations. Following these actions, the doctor was assessed greater than $4 million dollars of penalties after the IRS deemed him to be a responsible party under 26 U.S.C. § 6672.
Under Section 6672 of the U.S. Tax Code, a responsible party can be held personally liable for unpaid payroll tax obligations when certain conditions are met. These conditions are met when a taxpayer is deemed to be a “responsible party” for their business or organization and he or she “willfully” failed to collect, account and hold, and turn over employment trust fund taxes.
As the owner of the practice, the doctor did not challenge the IRS’s contention that he was a “responsible party.” Rather, the business owner focused his efforts on illustrating that he did not willfully fail to collect, account for, or pay taxes that Family Practice owed to the IRS. However, case law holds that “[O]nce an assessment of trust fund penalties and employment taxes is made and it is determined that the taxpayer is a responsible party, the burden of proving lack of willfulness shifts to the taxpayer.” Mazo v. the United States, 591 F.2d 1151, 1155 (5th Cir. 1979). Thus, due to the doctor raising this argument so late in the process following assessment, he had to meet the burden of proof.
Further weakening the Doctor’s argument was the fact that the willfulness standard, for purposes of payroll tax fraud, does not require a taxpayer to have a bad motive or ill-will. Rather, all that is required is evidence of a taxpayer choosing to pay third-party creditors rather than back taxes when he or she knows that back taxes are due.
Here, the taxpayer loaned his business money after becoming aware of the payroll tax obligation that was due and owing. The loan made by the doctor contained a restrictive endorsement earmarking it “for the restricted purpose of . . . using the funds to pay the May 15, 2009 payroll.” The loan was, in fact, used for the purposes of making payroll payments and not for purposes of paying taxes.
While the doctor made several technical arguments regarding encumbrances and the had a dire need to pay his employees, the court was not persuaded to the Doctor’s point of view. The court entered judgment for the government and sustained the more than $4 million penalties imposed.
When a taxpayer faces a payroll tax allegation, it is essential that he or she receives on-point, actionable legal advice at all stages in the process. While the Doctor undoubtedly had good intentions in making the loan to his business, his handling of the matter resulted in additional employment tax related penalties. Furthermore, had the Doctor raised his technical arguments at an earlier time, it is at least possible that the burden of proof shifting would not have occurred and he consequently would have faced a more receptive Court.
The Tax Attorneys of the Tax Law Offices of David W. Klasing may be able to fight for you and your business if you are facing a payroll tax audit or collection attempts. It is imperative to obtain representation if you are faced with a responsible party determination as trust fund liability is jointly and severally assessable against all IRS deemed responsible parties and this issue can be litigated where necessary to fight off an unfair IRS determination. To schedule a confidential reduced rate initial consultation, please call our Los Angeles or Irvine law offices at 800-681-1295 or schedule online today. Here is a link to our YouTube channel: Click Here.
Here is a link to our practice overview video on Employment Tax Representation