By: A.J. Cook

When the company you work for goes belly up, will the Internal Revenue Service demand you pay taxes your employer should have paid?

One shock employees and members of the board of directors can get after their company fails is a bill for employee withholding taxes it failed to pay. The bill you receive is called the 100 percent penalty.

A public relations firm must have told the agency this was bad for its image. So the IRS changed the name to the Trust Fund Recovery penalty.

The theory behind this onerous fine is that someone with the company paid company bills with money collected for the IRS. The penalty is aimed at the person responsible for the diversion. But sometimes the agency goes fishing and bills everyone in sight, with little regard for that person's authority over corporate finances or even knowledge of the nonpayment.

In the past it snared these people in its net:

• A part-time bookkeeper.
  
• An office manager who didn't take over that position until after the funds were diverted.
  
• A computer whiz running the technical end of the business unaware that the financial officer wasn't paying the taxes.
  

Fortunately, courts reversed the IRS decisions in each case.

The problem wouldn't exist if the IRS would speed efforts to collect from the corporation before it goes bust. Short of that, the agency should abandon its shotgun approach.

The Community Assistance Corporation didn't pay the IRS the employee withholding taxes. Ray C. Anderson and other company directors figured the agency made a mistake when it demanded they pay the taxes.

Community, providing housing and services for mentally retarded persons in Duxbury, Mass., was organized and headed by Charles Virga. He recruited authorities in the mental health field for the Board of Directors.

Virga controlled the organization's financial operations including decisions on which creditors to pay. He floated loans between 150 bank accounts, without the board's knowledge, trying to keep the company above water.

After learning of the inappropriate behavior, the board members resigned - - but too late. The corporation, now broke, had paid company bills with employee withholding taxes. The agency insisted that the board members pay.

Why the board? Because Virga had no money. The IRS argued in court that the directors were responsible just because of board membership. The judge disagreed. The directors had no authority to divert the taxes, one requirement for liability. A person is not liable, he said, because of board member status alone.

The Moral: Holy Mackerel! If you go fishing, hook the right fish.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
This information is not intended for use without professional advise.
Disclaimer
Released 12-6-93