Legal Memorandum: Failure to Pay Over Withheld Taxes

Issue: May the IRS impose a 100% penalty against an individual for withholding taxes due from a company that employed the individual based solely on his authority to sign checks on behalf of the corporation, even though he was neither a shareholder nor an officer, nor exercised any discretion over accounts payable or receivable?

           Internal Revenue Code §§ 3102(a) and 3402(a) require an employer to deduct and withhold income and social security taxes from the wages paid to employees.  Section 7501 of the Code provides that the withheld taxes must be held by the employer as a special trust fund for the benefit of the United States.  These "trust fund taxes" are for the exclusive use of the United States and are not to be used to pay an employer’s business expenses or for any other purpose.  I.R.C. §§ 3102(b), 3403, 7501(a).

The Code provides that "[a]ny person required to collect, truthfully account for, and pay over any tax . . . who willfully fails to collect such tax or truthfully account for and pay over such tax . . . shall . . . be liable to a penalty equal to the total amount of tax evaded, not collected, not accounted for and paid over."  Id. § 6672(A).  "Any person" is defined to include an officer or employee of a corporation who is under a duty to perform the act in respect to which the violation occurs.  Id. § 6671(b).

Two factors must exist to impose liability under § 6672:  1) the individual must be a person responsible for the collection and payment of withholding taxes ("responsible person"); and 2) the responsible person’s failure to comply with the statutory requirements must be willful.  E.g., Teel v. United States, 529 F.2d 903 (9th Cir. 1976).

A taxpayer is not a responsible person if he had no authority or discretion with respect to his […]