Manager’s lies are no excuse for failing to deposit payroll taxes

Almost nothing will excuse a failure to deposit payroll taxes. Reason: Depositing payroll taxes is a nondelegable duty, so even if you assign this task to someone inside or outside the company, you’re still on the hook if your taxes aren’t deposited. A federal appeals court ruled that the IRS can assess failure-to-deposit penalties against an employer, even though the employer had been led to believe by an employee and an outside CPA that its taxes had been deposited. (Deaton Oil Co. v. U.S., No. 17-2326, 8th Cir., 2018)

Oh what a tangled web we weave. The IRS notified an employer that it failed to deposit its payroll taxes and file Forms 941 from 2010 to 2013. The employer conducted an internal investigation, which revealed that its operations manager concealed the fact that he failed to deposit the taxes and file the returns. Worse: The outside CPA told company execs that the taxes had been deposited, but didn’t verify that statement with the operations manager.

The employer paid $250,000 to the IRS and filed Form 843 to request a refund for 2010, 2011 and 2012. The IRS denied the refund claim and the parties squared off in court. The IRS wanted the case dismissed. The employer argued that it had reasonable cause for these failures, first because of the operations manager’s profound misconduct and second, that it relied on the CPA, who said the taxes had been deposited.

No reasonable cause here. A federal trial court ruled for the IRS and an appellate court affirmed the trial court’s decision. The appeals court made two key points. First, that an employee’s failure to file returns and deposit taxes doesn’t constitute reasonable cause, unless the employer is disabled by the failure. Court: Here, the employer wasn’t disabled because the operations manager worked within the corporate structure and was supervised by the company’s owner.

Second, the court noted that relying on an outside tax professional’s advice is appropriate if you’re asking for tax advice. Reliance doesn’t extend to tax deadlines, because those need no interpretation, the court said.

Payroll Handbook D

THE TAKEAWAY: To establish reasonable cause, you must be able to prove that you exercised ordinary business care and prudence and despite that, your payroll obligations remained unfulfilled. Ordinary business care and prudence usually means that you have safeguards, such as internal controls, to ensure that your payroll obligations are met. Internal controls, even something as simple as requiring the company president to sign off on the 941s, would have picked up the operation manager’s deception.