One of the most important benefits of a corporate structure is that it tends to shield the individuals involved with running the company from exposure to lawsuits and other legal problems. A Limited Liability Company (LLC), for example, limits liability – that is the whole point.
However, the corporate shield against individual exposure is far from perfect. One important area where employees or executives could face legal problems involves corporate tax debts. In particular, individuals within a company could be on the line for failure to pay payroll taxes.
The IRS is motivated to pursue individuals on these claims
When a company does not timely file or pay its FICA and withholding taxes, the IRS still must pay the return money entitled to the employees. The IRS does not want to absorb those costs, so it will first seek out late payments and possibly fines and penalties from the employer who failed to file or pay.
However, if the employer is insolvent or lacks sufficient funds to cover those costs, the IRS still wants its money, so it will seek out the individual responsible for the failure.
Individual liability
While the IRS can seek out remuneration from individuals within a company, it cannot simply go after everyone and anyone in the company.
There are two elements required for holding an individual accountable for a company’s nonpayment of payroll taxes:
- The individual must be the “responsible person.”
- The individual must have failed in this regard willfully.
Numerous considerations go into determining whether someone is a “responsible person.” Under 26 U.S. Code § 6671, a person (for purposes of this legislation) is defined as “an officer or employee of a corporation…who…is under a duty to perform the act in respect of which the violation occurs.”
In the case of failure to file or pay payroll taxes, the responsible person would be an officer or some other employee who had direct involvement with payroll or accounting or had authority to pay creditors.
It is not enough to show that someone was responsible for the failure of the company in paying its payroll taxes. The IRS also has to establish that the person committed the breach willfully. This is much more difficult to establish, but it can be done.
What can you do?
If your company or employer is being pursued by the IRS for failure to pay payroll taxes, it is important to protect yourself as an individual, as well. The analysis above is high-level and very general. In reality, these cases involve significant nuance and legal complexity.
The first and most important thing you can do is talk with an experienced tax lawyer about how to protect your rights and options. You do not want to bear the financial burden of your company’s tax liabilities.