In Trust

Federal employment tax withholdings are considered government property, which an employer holds “in trust” until the money is paid to the IRS. The penalty for willfully failing to turn over the tax amount to the government is known as the 100% trust fund recovery penalty because it is equal to 100% of the unpaid taxes.

In the Hot Seat

In one recent case, the IRS was successful in its efforts to hold a corporation's former CFO and CEO personally liable for the penalty. The company, which eventually declared bankruptcy and liquidated, failed to remit more than $5 million in payroll taxes over a period of several years.

In granting the IRS summary judgment, the court noted that the CFO had the authority to direct and decline creditor payments, sign checks, oversee general cash flow, and hire and fire employees in the accounting department. When questioned, he admitted that he knew that other creditors were being paid before the IRS.

The CEO held general control of the company's operations, could hire and fire employees, and had the authority to sign checks. Although he was told about the tax problem, he did not take action to correct it, instead delegating the problem to the CFO. According to the court, “his apparent choice to turn a blind eye and a deaf ear” to warnings that the payroll taxes were not being paid, while shifting blame to the CFO, did not relieve him of personal liability.

Assessment Period