Being 'Responsible' May Bankrupt You

Protecting Yourself from the IRS Penalty 6672

Are you a responsible person?

Many of you may be sitting there nodding because, of course, you are! But the truth is you should be careful how you answer that question. In certain scenarios, when dealing with, say, the IRS, the word “responsible” may be applied in ways that give it new, deeper and potentially grave meanings. For instance, few small business owners are familiar with IRS Penalty 6672 — especially those who haven’t inadvertently found themselves on the wrong side of it.

The full statute can be found here, but the gist of the law is as follows:

If you are, or were, a corporate officer for a company that, for one reason or another, has failed to remit payroll taxes to the IRS, and are found to :
     a.) be “a responsible party” and
     b.) have willfully withheld that money from the IRS, 
then you may now be deemed personally responsible for paying 100% of that money back to the government. 

It does not take much calculation to see that, even for small businesses, the figures in these cases can quickly spiral into the millions of dollars – all placed squarely on one individual’s shoulders. On top of that, as is the case with so many debts owed to the federal government, bankruptcy offers essentially no protection. The IRS gets their money one way or another—placing liens, levying bank accounts. Your estate will even remain responsible after your death.

So, faced with such a sharp-toothed statute, a number of questions naturally arise:

  • How can this happen?
  • How is one deemed a responsible party?
  • What constitutes “willful” withholding?
  • How can I protect myself?
  • And what in the world do I do if I find myself in this quagmire?

How can this happen? The simplest answer is ‘many ways’ and, unfortunately, the “responsible” burden may very often fall on people who had no inkling that there was anything wrong before the IRS came knocking on their door.

How is one deemed responsible? Can you sign company checks? Do you have access to a corporate checking account? Do you own substantial stock in the company? Can you hire and fire employees? Do you, or have you, signed the company’s tax forms? There are a number of factors that go into this decision, but you’ll note from the criteria, that it need not be just the CEO, CFO or the like who falls into those categories. Comptrollers, board members and many others may wind up in the IRS’ cross-hairs.

What constitutes ‘willful’ withholding? Unlike the above question, here the IRS has painted a bright line denoting what they view to be “willful”. Unfortunately, for the IRS, the concept has a hair trigger. Did you pay literally any other bill—rent, electricity, internet—while this debt was outstanding? Essentially, if you did not pay the government first, then it amounts to willful withholding according to the IRS.

Lastly and most importantly:

How can I protect myself? And what in the world do I do if I find myself in this quagmire?

When clients come to us with this issue, we ask one, simple first question: Do you owe this money? If the answer is ‘yes’, then the solution is ‘pay’. Pay promptly and, if you can’t pay it all, start working proactively with the IRS to negotiate terms. In this scenario, that is literally the only way the issue is going away. However, for those unfortunate people saddled with facing this penalty who feel they have a legitimate case, the only solution is to fight it out in court.

We have worked with a number of clients facing this issue and there are steps to be taken and strategies to explore. It is not an easy process, but there is no other alternative to rectify such a situation. We work with you to lighten the burden as much as possible.

As to the issue of protecting oneself, that is a little trickier. The simplest answer is to make sure your taxes are always being paid and paid promptly. The other caveat is to understand that with a title, stock, access to a company checking account, or the ability to sign company checks, comes a tremendous responsibility—quite literally—that shouldn’t be glossed over. The IRS certainly doesn’t!

And, if you still have questions or concerns, probably best to ask a lawyer.