In an economy where many businesses are struggling to operate and cash shortages are all too commonplace, it is important to remember that the one obligation a company absolutely must pay currently is withheld payroll tax remittances. Remember that any officer, manager or other controlling person who decides to pay company creditors rather than remit the withheld employment tax liabilities may be held personally liable for the taxes they failed to pay over.
The government takes an extremely dim view of this particular problem. The IRS position is basically that the company has stolen funds that do not belong to it, and therefore those persons who failed to pay them over will be pursued relentlessly. Those of us who deal with such audits know how dogged the IRS can be on these issues and how difficult it can be to resolve these matters.
A good example of this is a recent case in which a US District Court granted summary judgment to the IRS on the question of whether the president of a closely held business could be held personally liable for choosing to pay company creditors before paying the withheld FICA and other payroll taxes to the government. It is rare when the IRS wins on summary judgment, but here the law and the facts were crystal clear. Once a tax liability is due, willfully choosing to pay any creditor other than the IRS will result in personal liability to the persons responsible for payment.
For those interested, the case is U.S. v. Brown, 104 AFTR 2d 2009-7835 (DC CT). (Click the "Download PDF" link to the left to read more about this case)
Couple this with the fact that the IRS is girding for a major audit push in the employment tax area and it is clear this is an area where compliance issues are being vigorously enforced. The Internal Revenue Service has recently announced that it is on the verge of completing its training of a whole new batch of examiners in anticipation of a three-year employment tax audit program that will begin in mid February.
The IRS has stated that in addition to the usual compliance and reporting matters, these audits will include examination of employee/independent contractor status, executive and officer compensation and fringe benefits issues.
The bottom line in the employment tax area is that companies must get current and stay current on employee payroll taxes or else the principals may endure a most unwelcome and unpleasant visit from the IRS.
If you have any questions about how employment taxes will affect you or your business, please contact a member of our Tax Practice.