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Lessons from the Tax Court: No reprieve from 100% penalty

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in Small Business Tax,Small Business Tax Deduction Strategies

Under the so-called “100% penalty,” a person who is found to be responsible for withholding federal in­­come and employment taxes from employee paychecks and paying overwithheld amounts to the government can be held personally liable for any withheld amounts that are not paid over. The courts often side with the IRS on this issue, so higher-ups must stay on their toes.

In a new case, a construction firm owner was held liable for the 100% penalty, even though the funds were embezzled by another officer. (Perrenod v. U.S., No. C 12-03815 WHA, No. Dist. Calif., 7/13/13)

Facts: Perrenod, Thompson and Romo each owned one-third of Parallax Design and Construction, Inc., a California firm. Perrenod was president and supervised upper-management employees. Thompson, the CFO, handled all the bookkeeping and accounting, while Romo managed daily operations.

Thompson often worked on the company’s books at home. He had complete control over the financial records. Eventually, Perrenod discovered that Thompson had failed to pay numerous creditors while embezzling hundreds of thousands of dollars. He and Romo fired Thompson in 2005 and he started paying off creditors. Perrenod then contacted the IRS about unpaid federal income and employment taxes, but not as to the third and fourth quarters of 2004.

The IRS hit Perrenod with penalties totaling more than $50,000 for those two quarters. Although he conceded he should be treated as the responsible person after firing Thompson in 2005, Perrenod disagreed with the prior assessments. He sought summary judgment in court.

The district court in California noted it wasn’t clear if Perrenod actually knew about the unpaid employment tax liabilities before paying the creditors. But it said he should have known Thompson was unreliable when he discovered the past due amounts. Thus, the court dismissed Perrenod’s request for summary judgment.

Tip: Stay on top of required deposits of withheld federal income and employment taxes by requesting confirmations from the designated party.

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