A recent court case shows why you shouldn’t assume your business partner or bookkeeper is making the proper payments to the IRS. Are Your Payroll Taxes Being Paid?
Imagine waking up one morning and finding an envelope in your mailbox from the IRS. Upon opening it you see it contains a letter indicating that you owe nearly $190,000 in taxes that were due but never paid. The worst part about this nightmare is that the tax liability is not yours but the law still requires you to pay. Could this happen? Yes. This actually happened to Timothy Jenkins and a recent court ruling means it could also happen to you.
The Danger of “Trust Fund Taxes”
“Trust fund taxes” refers to taxes that employers collect from employees on behalf of the federal government. When your company pays employees, you withhold payroll taxes–which include FICA and Medicare taxes–and income taxes from the employees’ compensation. This money really belongs to Uncle Sam and your company is simply holding it “in trust” until you send it along to the government for processing. If you work with a third-party payroll processing company then they usually take care of this for you.
Sometimes, circumstances cause companies to collect the trust fund taxes from employees, but not send them along to the IRS in a timely manner. A lack of cash, poor records management, ignorance or employee fraud could all be reasons that cause this to happen. Just like business income taxes, your company owes the money and must pay. When companies don’t pay, the IRS relies on the Trust Fund Recovery Penalty (TFRP). The Internal Revenue Code (IRC) section 6672(a), which authorizes the TFRP, makes executives and owners who willfully or fraudulently fail to pass along the trust fund taxes personally liable for them.
The Case of Timothy Jenkins
In 1992, Timothy Jenkins co-founded a magazine company. His business partner was responsible for managing the day to day operations and this included managing trust fund taxes. The following year the company collected these taxes from its employees but failed to pass all of it along to the IRS. Facing a cash crunch, Jenkins’ partner chose to pay vendors with the money hoping that he could make up the difference later. Jenkins did not learn of this problem until 1995. He tried to rectify the situation in part by removing his partner from day to day management. In 1998 he received the infamous request from the IRS for payment. After the IRS got paid in 2005 and 2006 through tax levies, Jenkins sued for a refund, claiming that he did not willfully try to defraud the IRS of anything. After all, he was not responsible for handling payroll taxes, did not submit the returns nor was he part of the decision-making that lead to the unfortunate incident.
A little about Mike Periu
Periu founded Proximo, LLC nearly 15 years ago. The company provides small business education and training services with an emphasis on finance and technology.
Periu teaches empowerment through entrepreneurship and economic opportunity. He regularly appears on television and radio talking about these subjects.
Periu also writes for leading blogs about finance. These include: American Express OpenForum, Yahoo! Finanzas and the Huffington Post.
Periu studied Finance and International Business at Georgetown University. He is a Board member at the Council for Economic Education.
