Fail to deposit your payroll taxes on time and the IRS can go after anyone in the company it considers to be a responsible person. Caution: If you are responsible, you will be liable for 100% of those undeposited taxes.
The IRS recently lost its bid to hold an office manager responsible, after a federal trial court ruled that whether she was a responsible person was a matter for a jury to decide. The case proceeds to trial. (Arndt v. U.S., No. 2:11-cv-00546, D.C. E.Wis., 2013)
Painting company brushes the IRS the wrong way. The office manager’s brother-in-law owned a painting company. She answered the phones, opened mail, typed and proofread job estimates and organized the company’s files. She also helped process the payroll and filed the company’s payroll returns; either she or her brother-in-law signed the returns. She had full check-signing authority on both of the company’s bank accounts, but she was told which bills to pay.
The company experienced cash-flow problems after several clients declared bankruptcy. Tax defaults followed. The IRS sought to hold both the brother-in-law and the office manager responsible for the company’s undeposited taxes.
On the IRS’ motion for summary judgment, the office manager testified that she signed checks and the tax returns because her brother-in-law was frequently out of the office. Her brother-in-law backed her up.
Let a jury decide. The court noted that the evidence strongly suggested that the office manager was a responsible person: she had full check-signing authority, paid the company’s bills and filled out and signed the company’s payroll tax returns. But, said the court, there are exceptions to the rule. Court: The key to the office manager’s liability is her credibility. Matters of credibility are up to a jury to decide, not the court.
• DEGREES OF CONTROL: To be considered a responsible person, you don’t need to have exclusive control over the company’s funds or the final say over which creditors get paid first (the IRS always comes first). You only need to have significant control over the company’s funds. Significant control generally means the ability to impede the flow of business to the extent necessary to prevent a tax default.
If you find yourself in a similar position, it’s prudent to clarify your authority, even if it means giving up the company checkbook. It’s also advisable that you prepare to resign if the company defaults on its payroll taxes.