By: Steven D. Hamilton, Principal, Steven D. Hamilton, CPA

July 11, 2014 9:41 pm EDT
Payroll

A few years ago someone asked me to “run their payroll.” This particular place had enough issues to fuel multiple seasons of Game of Thrones, among the least of which was an inability or unwillingness to pay their payroll on time.  It was just a matter of time until someone reported them to a government agency. I was to timely process the payroll, transfer funds, make tax deposits and so on.

My answer?

Not a chance.

I have no problem processing a payroll. The one thing I will not do however is involve myself with making payroll tax deposits.

Why?

There is an IRS penalty out there called the “responsible person” penalty, which we have previously referred to as the “big boy” penalty. This is gallows humor, and you want nothing to do with this boy. The IRS becomes very grim when one withholds payroll taxes and fails to remit them to the government. They consider it theft. The IRS roots around to learn who in the company had control over cash – that is, who decides who to pay, who can sign checks, that type of thing. If that person is you, you may be a “responsible person,” meaning that you are also liable for the payroll taxes. The IRS can chase the company, it can chase you, it can chase both of you. You have stepped into someone else’s problem.

Where have I seen this? Mostly it stems from severe cash flow pressures, such as after the 2008 business crash. My last responsible person penalty client was a contractor on the Kentucky side of Cincinnati. What made it frightening was the IRS interviewing the controller/office manager in addition to the owners. Why? Because, once in a blue moon, she would write a check, mostly if there was no one else available to sign. That woman was understandably terrified.

I am reading a District Court decision coming out of Virginia. From 1990 to 2000 Brenda Horne was the office manager for a medical practice. Her duties included:

  • Billing customers
  • Collecting accounts receivable
  • Making bank deposits
  • Writing checks
  • Preparing, signing and filing payroll tax returns
  • Decisions about hiring, firing and employee compensation

The company stopped making payroll tax deposits in 2006.  Brenda continued writing and signing checks to everyone but the IRS.

The IRS came in. The company owed over $2.8 million in back payroll taxes.

And now, so does Ms. Horne.

Perhaps she was part of this. Perhaps she was under-informed and went along in order to keep her job. She wouldn’t be the first. The fatal fact? That she could decide who to pay, who not to pay, and could sign checks accordingly. The IRS did not get paid, and they held her responsible.

Granted, the owners of the company are responsible long before an office manager is, but that is not the way the IRS approaches this. The IRS is happy to have several responsible persons. That increases the odds of collecting from someone. Theoretically, she could sue the medical practice and its owners for restitution if the IRS compelled her to pay. Considering that the company did not – or could not – pay the taxes when due, I am skeptical that it could pay Brenda Horne now.

It does not matter what she was paid for being an office manager. It cannot approach $2.8 million.

And the company’s loyalty to her?

She got fired at the end of 2010.

The views and opinions expressed herein are those of the author(s). Core Compass’s Terms Of Use applies.

About the author

Steven D. Hamilton is a career CPA, with extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.

responsible person penaltypayroll administrationpayroll taxespayroll processing
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