Revenooer Rants: Don’t play games with payroll tax deposits

Jeff Quinn

Jeff Quinn

Business owners sometimes get themselves into a pickle, and have to scramble for the cash they need to keep the ship afloat.

And on occasion, more than one business owner has been known to “borrow” from the stash of cash which can build up from all those payroll taxes they withhold from their worker bees, instead of immediately forwarding the dough on to the Revenooers, as is required by law.

And a recent decision of the Tax Court once again slapped yet another business owner — and slapped hard in asserting the 100 percent penalty which the law prescribes.

In the Hellman case, the Court held a corporation’s sole shareholder and president to be a “responsible person,” as defined in the law, who willfully used withheld funds to pay the business’ operating costs instead of paying its employment taxes.

The Internal Revenue Code, you see, imposes the “trust fund recovery penalty” on any person who (1) is responsible for collecting, accounting for, and paying over payroll taxes, and (2) willfully fails to perform this responsibility. The amount of the penalty is equal to the amount of the tax that was not paid over.

In determining whether there is willfulness, the courts have focused on whether a taxpayer had knowledge about the nonpayment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.

In this case, Ms. Hellman caused her staff to withhold, alright, but failed to remit those taxes to IRS and instead knowingly used them to pay other operating expenses — a definite “no-no” in the eyes of the Revenooers. She filed the quarterly payroll tax returns, all of which reflected the employment tax balances due, but no payments were made.

Along comes the nasty IRS collection people (and they are nasty, indeed!), slapping Ms. Hellman with the 100 percent penalty.

The undisputed facts established that, during the periods in question, she had incorporated the business, was its sole shareholder, president, CEO and director, and had sole signatory authority over its checking account.

She oversaw the withholding process, for sure, but knowingly used the withheld funds to pay operating expenses instead. The Court had a pretty easy time of it, in this case, concluding that she was clearly liable for the 100 percent penalty.

Bottom line — don’t play games with your employees’ money, withheld in the form of payroll taxes. Find some other way to supplement your company’s cash flow.

CONSULT YOUR TAX ADVISER – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation. Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He welcomes comments at

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