IRS won’t bow to Tax Court in payroll tax case
Closely-held corporations and their owners can seem inseparable. But this fluidity stops at Payroll’s door—in other words, when income tax withholding begins. The IRS recently issued a document called an Action on Decision (AOD) in which it said that it won’t follow a Tax Court decision that required it to honor a company’s designation of its delinquent payroll taxes as payment for a specific employee’s delinquent income taxes.
Impact: An AOD means that the IRS will accept the court’s decision, but it won’t be bound by it in future cases, and it will look for and continue to assert its position in similar cases. (AOD 2014-01, IRB 2014-48)
Two delinquencies for the price of one. The primary Tax Court case arose when a married couple became delinquent in their income taxes. The corporation they controlled likewise became delinquent in its payroll taxes. As part of the couple’s plea agreement, and on their attorney’s advice, they transferred money to their corporation, with instructions that it remit the money to the IRS. The remittances were accompanied by letters designating the payments as Form 941 taxes that were to be applied to the couple’s income taxes, which should have been withheld, but weren’t. The IRS refused to honor these designations.
The Tax Court ruled that the IRS was required to honor the corporation’s designations of those payments, and credit the payments to the couple’s income tax liability. Tax Court: Ensuring that the IRS honors taxpayer designations of voluntary tax payments is essential to upholding the policy against double collection of the same tax. Here, the court said, there was a single underlying tax liability—the owners’ individual income taxes.
Not so fast. The IRS noted its disagreement with the Tax Court in the AOD. IRS: It’s true that taxpayers may designate voluntary payments, but designations are limited to their own tax liabilities. For example, an employer can designate a payment of payroll taxes toward the trust fund portion of its payroll tax liability. If, however, an employer could designate an employee’s income tax liability, the employee could get a credit for those taxes long after the 1040 on which that credit should have been claimed was filed.
ALTER EGOS NO MORE: Money often flows freely between closely-held companies and their owners. But this AOD should serve as a warning that closely-held corporations should get their books in order. The IRS remains on the lookout for similar cases so it can establish a model for owners’ and corporations’ tax liabilities.