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Responsibility for withheld taxes.


From a tax perspective, one ofa business's most basic responsibilities is to withhold and collect income and employment taxes from its employees' wages and to deposit them at regular intervals with authorized depositories or federal reserve banks.

Sometimes, especially when a business is in financial difficulty or has a severe cash flow problem, these withheld taxes collected by the employer do not get deposited and are used for some other purpose.

To ensure the collection of such delinquent or misappropriated funds, the Internal Revenue Service has the authority to take direct action and swiftly go after the employer. One of the major weapons the IRS has is the right to assess individuals personally for the full amount of taxes due; this is known as the "100% penalty." The IRS may go after not only the employer and its employees but also any other third party associated with a business who may be considered a "responsible person."


A responsible person is the individual (or those individuals) who is required to collect and pay over taxes and who willfully fails to. Basically, the responsible person has the overall authority for ensuring the collected funds were paid over in the proper manner and has the ultimate decision as to which bills and creditors should be paid and when. (This control need not be exclusive, as long as it is significant.)

While there is no specific title or position within a company that will always identify the responsible person for a business, certain factors determine which individual has responsible person status. All these factors center on who has sufficient control over the company's financial dealings and affairs:

* Those individuals responsible for general financial affairs, as evidenced by an individual's title, job description, the ability to sign checks for the business or responsibility for preparation of the company's tax returns.

* Those individuals with the broad authority to operate the company, such as corporate officers or directors.

* Those individuals with an entrepreneurial stake in the business.

The IRS may assess penalties against more than one individual. Any or all persons with authority over payroll and withholding matters may be considered responsible persons.

Because the basic criterion is sufficient control of a business's financial affairs, under appropriate circumstances, third parties (such as shareholders, investors, creditors, insurance companies, accountants or attorneys) might be deemed responsible.


There are certain situations in which third-party lenders provide companies with money by directly paying wages to employees; in such situations, often only net wages (that is, not including the taxes that should be paid) are paid to the employees. Lenders (and others who assume responsibility for expressly paying a company's employees) are directly liable for paying the taxes due the IRS. In addition, the lender who supplies funds may be liable if he or she has "actual notice or knowledge" that the responsible person who should be paying the taxes is not.


To be considered a responsible person, in addition to having financial authority, an individual must have acted willfully. However, this has come to mean the responsible person was aware of the outstanding taxes and knowingly and intentionally used the funds for other purposes (even if they were business-related).

While lack of knowledge that payroll taxes are due may be reasonable cause that an individual's actions in not paying taxes were not willful, the applicability ofthisjustlfication is extremely limited.

For a discussion of responsible persons, see "The 100% Penalty," by Darshan Wadhwa, in the September 1992 issue of The Tax Adviser.

Nicholas Fiore, editor

The Tax Adviser
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:from The Tax Adviser
Author:Fiore, Nicholas J.
Publication:Journal of Accountancy
Date:Sep 1, 1992
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