Lessons from the Tax Court: Heed warnings on 100% penalty

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in Small Business Tax

We’ve warned business owners time and time again about the 100% tax penalty. How it works: If you’re responsible for willfully failing to deposit federal employment taxes withheld from employee wages with the IRS in a timely fashion, you may be held personally liable for 100% of the unpaid amount. And the IRS is inclined to tag business owners with this penalty even if they aren’t aware of any discrepancies.  

In the latest example, a sole shareholder was found personally liable, despite her limited involvement with the company.

Facts: A business owner restructured his company with his wife as sole shareholder. However, because she was the primary caregiver for the couple’s children, she delegated her authority in the corporation to her husband. Each spouse retained the right to sign company checks and order payments from its accounts.

From 2001 to 2004, the wife came to work once a month. On those occasions, she would approve board resolutions or perform HR tasks. Late in 2004, the wife was notified by the IRS that the company had not paid federal employment taxes for several quarters from 2001 through 2004. Upon receipt of the notice, she took steps to remedy the problem, including firing the payroll director who had been given the responsibility for making tax payments.

Despite her prompt reaction, the IRS found the wife to be a “responsible person” and assessed a penalty of more than $300,000.

Now the 4th Circuit has agreed with the IRS. The wife had the effective power to pay the taxes. Although she entrusted the responsibility to others, this did not relieve her of the responsibility. (Johnson, CA-4, 11/5/13)

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