Who Is The Responsible Party In A 941 Tax Default?
When a business fails to pay its 941 payroll tax obligation, who is the responsible party? The answer is that there could be many, with each being totally responsible for the entire tax, penalties and interest. This is a critical question often not considered in advance and asked way too late, resulting in much avoidable damage. Here is how it works:
Once the 941 breach occurs, it is infrequently ever repaid, thus even if you manage to regain control and pay the current tax bill, the arrears are seldom ever recaptured. Typically, there is simply not enough cash to ever cover it all. Just as typically, there is an owner calling the shots, ordering what payments are to be made and when. The owner is usually the one deciding when to pay all the bills, and certainly it is usually his decision not to pay the 941 taxes. He is the responsible party. Right? Financial officers, payroll clerks, Vice Presidents, or anyone else may be implementing the payroll system and thus, the tax payments, however, they usually answer to a more senior officer–the business owner–on this matter.
Of course, the larger the organization becomes, the more spread out decision-making may be and it is entirely possible that this decision may be determined by a non-owner officer. The second issue, after determining who may be the decision-maker, is determining who has signing authority on the checkbooks. This also has relevance, as sometimes there may be multiple signers or the owner may not sign the checks, or may sign checks occasionally, but not the payroll. This could include a number of people, all of whom have potential personal responsibility and need to be prepared for an examination.
Then, there is the Treasurer of the corporation, sometimes this is an “honorary” title but still one with great impact and one that is statutorily responsible by definition. An additional issue involved is the “flavor of the fact pattern.” A Treasurer (who may be the wife of the owner, for example), who may sign a few checks and make a few decisions, and who benefits from the revenue flow of the business and has knowledge that the taxes are NOT being paid may be held as a responsible party because of the weight of the evidence.
So here are the rules:
1. The Treasurer can be held responsible as one of his responsibilities, statutorily, is to pay the taxes. Thus, they are potential responsible party and can be held personally responsible for the tax debt.
2. The authorized check signer can be held responsible for unpaid taxes as this person is required to quit their job when they determine that the taxes are not being paid, effectively eliminating any potential personal responsibility for unpaid taxes.
3. The decision-maker who dictates who is paid, even if he is not a signor or does not sign, is held responsible.
Decision-making authority, knowledge, signing authority, title of Treasurer, receiving benefits from the failure to pay… all are major factors that determine who will be held as a responsible party. If deemed responsible, you are equally responsible for 100% of the debt due.
Typically, I see a dedicated bookkeeper with signing authority as a convenience to the owner, who may actually sign most of the checks or at least enough to warrant responsible party status but who is told not to pay the taxes by the owner. It is this person who is on the edge, who could be deemed responsible or not. The real issue is authority. The problem is the responsibility to quit when the taxes are not paid, to remove the possibility of responsible party status, but since that costs the employee his paycheck, it seldom happens. The worst situation of all is when the owner’s wife is the bookkeeper and signer. If she is deemed responsible, their home is vulnerable and a lien may be placed upon it if the service deems her also responsible for unpaid taxes. I see this issue all the time, and I usually attend the responsible party interview to assist the individual in answering the interview questions correctly so as to make certain if at all possible that no one other than the owner is deemed a responsible party. Most of the time the IRS officer is reasonable, and seldom are non-owners included as responsible parties, but on occasion it does happen and that’s a major problem. The owner does not want to see anyone else be held responsible. The individual is usually, and obviously, acting out of loyalty and should not be held responsible, but it can happen.
Be aware, plan appropriately and in advance. There is much danger in not paying 941’s. In the end it’s a judgment call, and bad judgment frequently prevails. Pay your 941’s or shut the door. That’s my advice… and that’s the law. Failure to pay never works out well. If you cannot afford to make the payments, you must reconsider your business plan as the problem, not the tax. The real issue is lack of liquidity or profitability or gross revenue or all three. Dissolve these problems and the tax issue goes away. The tax issue is merely a symptom of a deeper problem that must be resolved before the taxes can ever be paid.
We have had an employee for 25 years and she does our books. After that many years you grow to trust them completely. We are a small business and make a small profit every year. This past week we found a letter on her desk in the morning stating that we owed 7 years of payroll taxes totaling 250k and basically her resignation. I believe the reason she finally wrote the letter is that we have been a little behind on filing corporate taxes and the outside accountant that files the books started noticing things weren’t adding up. For the past 7 years she has never mentioned once that we were not paying them. When it came time to buy a company car, her answer was sure we are doing ok. When it came time to by company supplies and computers, her answer was sure we can afford it. How accountable is she for deceiving us all of these years and never paying these taxes?
This is extremely unfortunate, and very costly, but it is your responsibility to know what is being paid and not paid, the only asect h=that may be redeming is she may be considered the respnsibile party and ths obligated on the tax. However if her personal aility is not capable of aying 250,000 then it will probably fall on thw owners shouldrs.
I believe she will be considered a responsible prty but others may also.
Irrespetive of who is the responsible party here, you must consider a strategy to reduce these taxes to a managable amount and get them paid.
I need much more information to best advise you, and invite you to call me to discuss this matter further, as I doubt very much that even if she was deemed the sole responsible paqrty the company is at extreme risk as the IRS will liquidate the ssets to reduce the debt.
Even if your bokkeeper is held responsible I doub she has the resources to pay the bill so it wll ultimately fall on your lap anywy.
I can help you once I have more information.
We can resolve this. Call me.
Don 413-687-8388
My husband was a construction manager for a single owner carpentry contractor. The owner has publicly recorded tax issues (liens, warrants, etc) for 2 decades. Over the course of my husbands tenure the business grew substantially. The owner withdrew funds at his own discretion regularly from the business, which he and his wife owned. To get to the point: my husband was accused as a responsible party and we are being blacklisted (he cannot get employment) and bankrupted by defense costs. The IRS resolution officer has 1 item: a blank tax form that someone signed my husband’s name to- it is not his signature and we currently await her decision to proceed. The owner threw the few office employees names at the IRS to buy himself time via a tax attorney, my husband could not hire/fire, direct funds in any way, he has been vicitimized and blacklisted as the business owner has filed bankruptcy privately and personally. The original investigating agent (local) let the owner sell 3 properties and pocket the proceeds, inherit funds from his mother’s death, and much, much more, opting to persecute employees instead of the owner and his wife. The owner wrote a letter assuming all responsibility and still my husband has become entangled. Our account is a former IRS agent who cannot believe what has happened and reassures us it will all work out. Now the state has jumped on the bandwagon and is pursuing him as well. The original IRS agent withheld our stimulus check last year, which caused our credit score to plumment. We are near ruin and I honestly do not know when this now 2 year nightmare will come to an end. Any watchdog groups or victim groups you know of that could offer support? We have all sorts of original documentation to back my husband up- the owner knew his tax situation 24/7 and the IRS has opted to not hold his CPA who had his POA to discuss and resolve his tax issues responsible- any suggestions are greatly appreciated.
my wife is a 20% owner in a company and title tresurer but has no decesion making or check writing would she be held responsible for the 941 tax
Dear Staff, is the buyer of a S corp, via Stock purchase agreement, responsible for any unpaid 941 taxes? As owner I declared BK and live only on SS income plus a small private pension. Tks, Bill R
Bill, You bought the company when you purchased the stock, you are responsible for its debts including the 941 payroll faxes unpaid. Had you bought the assets you would have avoided this issue.
Thanks Mr. Todrin for your response. It was I who sold the company via stock purchase and via my business class(es) education, remember tax/legal differences between stock and assets purchases. for the last year, the IRS has been chasing me and I have been unable to find a local attorney that knew the answer to my Q. I owe you. I’ll make sure that I get your name and web site out to my client list. Tks, Bill R
There is a tax payers advocate board in every district as well as an opportunity to appeal he decision of you being a responsible party. None of this costs money. The issue is simply did your husband have the authority to make payable decisions and sign checks to implement them, if so he was a responsible party if not he was not…that is the issue, appeal and go to the tax payers advocate representative and get justice, it will occur.