High Penalty in Trust Fund Recovery Case Demonstrates Why California Residents Must Timely Pay Federal Employment Taxes
In Miller v. US, a Virginia-based medical practice allegedly failed to pay employment taxes withheld from workers’ paychecks during each year between 2006 and 2010. As a result, the organization owed the Internal Revenue Service (IRS) about $2.8 million in delinquent taxes. For about 20 years, the practice’s office manager was responsible for the company’s day-to-day administration and bookkeeping. She was also tasked with paying the organization’s creditors and involved in the medical practice’s personnel decisions until she was fired in 2010. Between 2006 and 2010, the office manager was apparently aware that the company was delinquent on its payroll tax requirements but opted to pay other creditors before the United States government. As a result, the former office manager was held personally responsible by the IRS for trust fund recovery penalties of more than $2.9 million.
In December 2013, the government filed a complaint in federal court against the medical practice’s former office manager to recover the financial penalty issued against her, plus interest. Since she failed to respond to the complaint, the U.S. filed a motion for summary judgment several months later. When a party to a lawsuit files a motion for summary judgment, that party is asking the court to issue a ruling in a case without proceeding with a formal trial. In order to succeed on such a motion, no genuine issue of material fact can be in dispute and the facts of the case must entitle a party to judgment based on the law. Normally, any question regarding the appropriateness of summary judgment will be decided in favor of the non-moving party.
The Internal Revenue Code compels employers in the U.S. to withhold certain taxes from a worker’s paycheck. Those funds are normally called “trust fund taxes.” Under the Code, an individual who is tasked with collecting or accounting for an employer’s deficient trust fund taxes and chooses not to do so may be held personally responsible. According to the federal court, 26 U.S.C. § 6672 states a responsible person must remit payroll taxes to the IRS. Whether or not an individual is a responsible person under the law requires a “totality of the circumstances test.”
In general, if an individual has the authority to pay any delinquent taxes, he or she will likely be deemed a responsible person by the IRS. Additionally, a responsible party will be deemed to have willfully failed to pay required payroll taxes if he or she had knowledge that the taxes were not being paid or demonstrated a reckless disregard for the payment of any taxes owed by an organization. One factor related to a personal representative’s willful behavior is whether or not other creditors were paid before the government. Since the Eastern District of Virginia found that the former office manager was a responsible person who willfully failed to pay the medical practice’s employment taxes from 2006 through 2010, the court granted the government’s motion for summary judgment and ordered the woman to pay nearly $3 million in taxes and interest.
Unfortunately, the penalty for failing to abide by our nation’s tax laws can be substantial. In addition, keeping up with annual changes to the U.S. tax code can be difficult. If you have questions about your obligation to pay federal payroll or other taxes, please contact tax attorney William Hartsock through his website. Mr. Hartsock has decades of experience advising clients in San Diego about international and other tax law matters. To speak with a knowledgeable tax lawyer about your situation, feel free to call Mr. Hartsock at (858) 481-4844.
Miller v. US, Dist. Court, ED Virginia 2014
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