McLaughlin Legal

PROBLEMS, PITFALLS, AND SOLUTIONS FOR PAYROLL TAXES

MCLAUGHLIN LEGAL

McLaughlin Legal

What mechanisms do the IRS, EDD, or BOE have to pierce the veil of limited liability and hold individual(s) personally liable for trust taxes?

Introduction

McLaughlin Legal

“Trust” Taxes

Federal Payroll

California Payroll Sales

McLaughlin Legal

IRS PAYROLL TAXES

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable. IRC §6672(a)

McLaughlin Legal

Calculating TFRP

The amount of the TFRP is equal to the unpaid balance of:

1. Unpaid income taxes withheld, plus2. The employee's portion of the withheld

FICA taxes.

McLaughlin Legal

When Do Problems Arise?

Financial difficulties Unsophisticated Embezzlement

McLaughlin Legal

1. Responsible2. Willful

Elements of TFRP

McLaughlin Legal

TFRP “Responsibility”

Responsibility is a factual question, and title is not controlling

Does the individual(s) have the authority/ability to decide which creditors to pay and when such payments should occur?

Indications of responsibility: Authority to sign checks, Control financial affairs of business, Being an officer or an employee of a corporation, a member or

employee of a partnership, a corporate director or shareholder, etc. Authority listed in by-laws or management agreement, Ability to hire and fire employees, Signs 941’s, Makes EFTPs payments.

McLaughlin Legal

TFRP “Willfulness”

A person willfully fails to pay over taxes if he acts or fails to act consciously and voluntarily, knowing or intending that as a result of his action or inaction trust funds belonging to the government will not be paid, but instead will be used for other purposes. Criminal “Willfulness” – a voluntary, intentional

violation of a known legal duty TFRP “Willfulness” – voluntary, conscious, and

intentional – as opposed to accidental – decision not to remit funds properly withheld to the government

McLaughlin Legal

Stated otherwise, willfulness is:1. Responsible person was aware of unpaid

payroll taxes, possessed power to pay them, but directed payments to other creditor(s), OR

2. Actions were grossly negligent or reckless disregard of fact that taxes were due and not being paid.

What is “gross negligence?”

McLaughlin Legal

How does the IRS go about a §6672 assessment?

Procedures in Assessment

McLaughlin Legal

Federal Tax Deposit Alert

Assigned to Revenue Officer1. Compliance2. TFRP Investigation

Summons bank signature cards4180 interview

4183 Recommendation1153(DO) Letter

AppealRefund

Appeals Conference

Refund1 Employee, 1Quarter ($100)

Form 843

Judicial Appeal(6 mon. or Notice of Disallowance)

U.S. District CourtCourt of Federal ClaimsBankruptcy Court

Collections1. OIC DATL2. CDP

McLaughlin Legal

McLaughlin Legal

4180

McLaughlin Legal

4180 (continued)

McLaughlin Legal

Letter 1153(DO)

McLaughlin Legal

Administrative Appeal

McLaughlin Legal

Administrative Appeal

McLaughlin Legal

Appeal Determination

McLaughlin Legal

What do practitioners need to know and gather?

Gathering Facts and Information

McLaughlin Legal

What to Know and Gather

Contact information of all IRS personnel involved All Form 941 for periods at issue Corporate minute book, by-laws, management

agreement, articles of incorporation, etc. Copy of bank signature card Accounting of EFTPs payments List of employees during period of issue and

payroll reports List of all officers, directors, employees, etc. of

entity

McLaughlin Legal

What strategies can be used to defend against a TFRP case?

Defending the TFRP

McLaughlin Legal

TFRP Defense Techniques

1. Lack of Knowledge Generally not a defense to responsibility, but may be to

willfulness

2. Individual(s) do not have duty, status or authority Check signing authority – important, but not necessarily

predicate Compare authority to participate in company’s affairs and

authority to control payment of creditors (Vinick v. U.S.)

3. Nuremburg Defense – just following orders Do the indvidual(s) exercise independent decision making

authority about which creditors get paid? Designed to relieve clerical and similar personnel

What if they continue to work at the company after discovering non-payment and confronting management?

McLaughlin Legal

TFRP Defense Techniques

4. Timing5. Establish negligence

Willfulness requires actual, gross negligence, or reckless disregard

6. “Reasonable Cause” – justification 10th, 5th, 3rd, 2nd, Federal Court of Claims 1st, 7th, 8th, 9th

7. Ability (inability) to pay by company or target individual(s) Were there funds available? Were they encumbered? Newly responsible person? IRM § 5.7.5.1 et seq.

8. Full pay9. Pay down Trust Fund portion

IRM §5.7.4.4(2)

McLaughlin Legal

TFRP Defense Techniques

10. In-Business Installment Agreement11. Control investigation

Prepare own 4180

12. Point Fingers Responsibility Willfulness Likelihood of collections

13. Statute of Limitations

McLaughlin Legal

EDD PAYROLL TAXES

Any officer, major stockholder, or other person, having charge of the affairs of a corporate, association, registered limited liability partnership or foreign limited liability partnership, or limited liability company employing unit, who willfully fails to pay contributions required by this division or withholdings required by Division 6 (commencing with Section 13000) on the date on which they become delinquent, shall be personally liable for the amount of the contributions, withholdings, penalties, and interest due and unpaid by such employing unit. The director may assess such officer, stockholder, or other person for the amount of such contributions, withholdings, penalties, and interest. The provisions of Article 8 (commencing with Section 1126) and Article 9 (commencing with Section 1176) of Chapter 4 of Part 1 apply to assessments made pursuant to this section. Sections 1221, 1222, 1223, and 1224 shall apply to assessments made pursuant to this section. With respect to such officer, stockholder, or other person, the director shall have all the collection remedies set forth in this chapter. California Unemployment Insurance Code Section 1735

McLaughlin Legal

EDD Payroll Taxes

Similarities to IRS TFRP Elements – responsibility and willfulness

Differences with IRS TFRP IRS – personal assessment limited to employee’s

portion (roughly 60%) EDD – personal assessment for entire corporate

employer’s burden Unemployment Insurance Disability insurance Employment training tax Personal income tax withheld Penalties (additional 10% under CUIC §1135) Interest

McLaughlin Legal

BOE SALES TAXES

(a) Upon the termination, dissolution, or abandonment of the business of a corporation, partnership, limited partnership, limited liability partnership, or limited liability company, any officer, member, manager, partner, or other person having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax, or who is under a duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company in complying with any requirement of this part, shall, notwithstanding any provision in the Corporations Code to the contrary, be personally liable for any unpaid taxes and interest and penalties on those taxes, if the officer, member, manager, partner, or other person willfully fails to pay or to cause to be paid any taxes due from the corporation, partnership, limited partnership, limited liability partnership, or limited liability company pursuant to this part.

(b) The officer, member, manager, partner, or other person shall be liable only for taxes that became due during the period he or she had the control, supervision, responsibility, or duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company described in subdivision (a), plus interest and penalties on those taxes.

(c) Personal liability may be imposed pursuant to this section, only if the board can establish that the corporation, partnership, limited partnership, limited liability partnership, or limited liability company had included tax reimbursement in the selling price of, or added tax reimbursement to the selling price of, tangible personal property sold in the conduct of its business, or when it can be established that the corporation, partnership, limited partnership, limited liability partnership, or limited liability company consumed tangible personal property and failed to pay the tax to the seller or has included use tax on the billing and collected the use tax or has issued a receipt for the use tax and failed to report and pay use tax. California Revenue and Taxation Code §6829

McLaughlin Legal

BOE Sales Taxes Continued

(d) For purposes of this section "willfully fails to pay or to cause to be paid" means that the failure was the result of an intentional, conscious, and voluntary course of action.

(e) Except as provided in subdivision (f), the sum due for the liability under this section may be collected by determination and collection in the manner provided in Chapter 5 (commencing with Section 6451) and Chapter 6 (commencing with Section 6701).

(f) A notice of deficiency determination under this section shall be mailed within three years after the last day of the calendar month following the quarterly period in which the board obtains actual knowledge, through its audit or compliance activities, or by written communication by the business or its representative, of the termination, dissolution, or abandonment of the business of the corporation, partnership, limited partnership, limited liability partnership, or limited liability company, or, within eight years after the last day of the calendar month following the quarterly period in which the corporation, partnership, limited partnership, limited liability partnership, or limited liability company business was terminated, dissolved, or abandoned, whichever period expires earlier. If a business or its representative files a notice of termination, dissolution, or abandonment of its business with a state or local agency other than the board, this filing shall not constitute actual knowledge by the board under this section.