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Who is responsible for the 100 percent Penalty?

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Perhaps the most severe penalty under tax law is known as the “100 percent penalty.” This means that if you are considered the “responsible person” of your company and it is found that you did not pay employment taxes that are taken from employees over to the government, you might be personally held liable for the total unpaid amount.

The definition of what a “responsible” party is under tax law is any individula who is responsible for collecting, accounting for or Penaltypaying the  taxes who willfully fails to complete the duty.

What constitutes willful behavior? “If a person knows that the actions are not done for whatever reason, the person is acting willfully,” according to the IRS. “Paying the other expenses of the business instead of paying the taxes is willful behavior.”

The IRS can be quite aggressive about the 100 percent penalty (also known as the Trust Fund Recovery Penalty) and the courts will often take its side in the argument, as shown in these two court cases:

In one case, Steven Lindsey was a 50 percent shareholder of TFS, which is a company that leased truck drivers solely to Clearwater Trucking Company, also another company owned by the same parties. When Clearwater entered into financial difficulty, it stopped paying TFS for the leased drivers. Consequently, TFS failed to pay the employment taxes withheld from its drivers’ wages. The IRS assessed the 100 percent penalty against Mr. Lindsey, but he claimed he was not a “responsible person” since he didn’t have check-writing authority for TFS. He argued that he did not willfully fail to pay the taxes. However, the Tenth Circuit Court found that check writing is only one facet considered in the equation. Lindsey basically had the power to pay the taxes, so he is considered personally liable for the unpaid amount. (U.S. v. Lindsey, 90 AFTR2d 2002-5468)

In another case,two taxpayers were involved in a partnership regarding a hotel. After the hotel was sold, the IRS determined that the payroll taxes were not paid. The partners argued that they could not be responsible for the withheld taxes since they had hired a couple to manage the hotel.

The court found that the partners had legal control over the business at the time the tax deposits were supposed to be made – even though the couple managing the hotel had an option to buy it and ultimately did purchase the property. As part of the evidence, the court stated that the partners had control over the bank accounts. (Harry Hunison and Bud Vigue, 2002-1 USTC 50,179; U.S. District Court)

Moral of the story: If you can be personally held liable for withheld employment taxes — whether or not you are an owner or officer of the company — you can protect your company by ensuring that Uncle Sam is paid on schedule. In many cases, the IRS can go after anyone.  Outsourcing payroll is a popular method which small businesses are using to ensure that their payroll tax obligations are met.


Do you have a payroll penalty horror story?  Please share by leaving a comment!

From federal to state and local tax filing, AdvaPay Systems offers guaranteed payroll services that not only protect our clients from liability but also provide peace of mind. 

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Darlene Tysinger

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