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
lia...
“Trust” Taxes
McLaughlin Legal
 Federal
 Payroll
 California
 Payroll
 Sales
IRS PAYROLL TAXES
Any person required to collect, truthfully account
for, and pay over any tax imposed by this title who
w...
Calculating TFRP
McLaughlin Legal
 The amount of the TFRP is equal to the unpaid
balance of:
1. Unpaid income taxes withh...
When Do Problems Arise?
McLaughlin Legal
 Financial difficulties
 Unsophisticated
 Embezzlement
1. Responsible
2. Willful
Elements of TFRP
McLaughlin Legal
TFRP “Responsibility”
McLaughlin Legal
 Responsibility is a factual question, and title is not
controlling
 Does the ind...
TFRP “Willfulness”
McLaughlin Legal
 A person willfully fails to pay over taxes if he
acts or fails to act consciously an...
McLaughlin Legal
 Stated otherwise, willfulness is:
1. Responsible person was aware of unpaid payroll
taxes, possessed po...
How does the IRS go about a §6672
assessment?
Procedures in Assessment
McLaughlin Legal
McLaughlin Legal
Federal Tax Deposit Alert
Assigned to Revenue Officer
1. Compliance
2. TFRP Investigation
Summons bank si...
McLaughlin Legal
4180
McLaughlin Legal
4180 (continued)
McLaughlin Legal
McLaughlin Legal
Letter 1153(DO)
Administrative Appeal
McLaughlin Legal
Administrative Appeal
McLaughlin Legal
McLaughlin Legal
Appeal Determination
What do practitioners need to know and
gather?
Gathering Facts and
Information
McLaughlin Legal
What to Know and Gather
McLaughlin Legal
 Contact information of all IRS personnel involved
 All Form 941 for periods at...
What strategies can be used to defend
against a TFRP case?
Defending the TFRP
McLaughlin Legal
TFRP Defense Techniques
McLaughlin Legal
1. Lack of Knowledge
 Generally not a defense to responsibility, but may be to
w...
TFRP Defense Techniques
McLaughlin Legal
4. Timing
5. Establish negligence
 Willfulness requires actual, gross negligence...
TFRP Defense Techniques
McLaughlin Legal
10. In-Business Installment Agreement
11. Control investigation
 Prepare own 418...
EDD PAYROLL TAXES
 Any officer, major stockholder, or other person, having charge of the
affairs of a corporate, associat...
EDD Payroll Taxes
 Similarities to IRS TFRP
 Elements – responsibility and willfulness
 Differences with IRS TFRP
 IRS...
BOE SALES TAXES
(a) Upon the termination, dissolution, or abandonment of the business of a
corporation, partnership, limit...
BOE Sales Taxes Continued
(d) For purposes of this section "willfully fails to pay or to cause to be paid"
means that the ...
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IRC 6672 - Personal Liability for Trust Taxes

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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? The presentation provides an overview for personal liability issues for payroll taxes, sales taxes, and other excise taxes.

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  • Opening: discuss story, i.e., who has heard this story before …
  • Gross negligence is when fails to investigate or to correct mismanagement after having notice.
  • Lack of funds  only if after-acquired funds encumbered or limitedTiming  critical point is when liability rosePay down trust fund portion
  • 1st, 5th, 8th Cir. have precedent that not quitting = TFRP
  • Timing – Teel v. US: knew had been arrearages, sold more merchndise to supply necessary wilfulnessAbility to pay – Slodovv. US: unencumbered funds may limit exposure, but precedent significantly erroded
  • terminated, dissolved, or abandoned,Control/responsibilityTiming (actually in control)WillfulTaxes collected
  • IRC 6672 - Personal Liability for Trust Taxes

    1. 1. PROBLEMS, PITFALLS, AND SOLUTIONS FOR PAYROLL TAXES MCLAUGHLIN LEGAL McLaughlin Legal
    2. 2. 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
    3. 3. “Trust” Taxes McLaughlin Legal  Federal  Payroll  California  Payroll  Sales
    4. 4. 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
    5. 5. Calculating TFRP McLaughlin Legal  The amount of the TFRP is equal to the unpaid balance of: 1. Unpaid income taxes withheld, plus 2. The employee's portion of the withheld FICA taxes.
    6. 6. When Do Problems Arise? McLaughlin Legal  Financial difficulties  Unsophisticated  Embezzlement
    7. 7. 1. Responsible 2. Willful Elements of TFRP McLaughlin Legal
    8. 8. TFRP “Responsibility” McLaughlin Legal  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.
    9. 9. TFRP “Willfulness” McLaughlin Legal  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
    10. 10. 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?”
    11. 11. How does the IRS go about a §6672 assessment? Procedures in Assessment McLaughlin Legal
    12. 12. McLaughlin Legal Federal Tax Deposit Alert Assigned to Revenue Officer 1. Compliance 2. TFRP Investigation Summons bank signature cards 4180 interview 4183 Recommendation1153(DO) Letter AppealRefund Appeals Conference Refund 1 Employee, 1Quarter ($100) Form 843 Judicial Appeal (6 mon. or Notice of Disallowance) U.S. District Court Court of Federal Claims Bankruptcy Court Collections 1. OIC DATL 2. CDP
    13. 13. McLaughlin Legal
    14. 14. 4180 McLaughlin Legal
    15. 15. 4180 (continued) McLaughlin Legal
    16. 16. McLaughlin Legal Letter 1153(DO)
    17. 17. Administrative Appeal McLaughlin Legal
    18. 18. Administrative Appeal McLaughlin Legal
    19. 19. McLaughlin Legal Appeal Determination
    20. 20. What do practitioners need to know and gather? Gathering Facts and Information McLaughlin Legal
    21. 21. What to Know and Gather McLaughlin Legal  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
    22. 22. What strategies can be used to defend against a TFRP case? Defending the TFRP McLaughlin Legal
    23. 23. TFRP Defense Techniques McLaughlin Legal 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 (Vinickv. 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?
    24. 24. TFRP Defense Techniques McLaughlin Legal 4. Timing 5. 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 pay 9. Pay down Trust Fund portion  IRM §5.7.4.4(2)
    25. 25. TFRP Defense Techniques McLaughlin Legal 10. In-Business Installment Agreement 11. Control investigation  Prepare own 4180 12. Point Fingers  Responsibility  Willfulness  Likelihood of collections 13. Statute of Limitations
    26. 26. 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
    27. 27. 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
    28. 28. 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
    29. 29. 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. McLaughlin Legal

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