Many business taxpayers fail to pay over payroll taxes to the Internal Revenue Service (“IRS”). By doing so they expose themselves to personal liability pursuant to Internal Revenue Code Section 6672 known as the Trust Fund Recovery Penalty (TFRP). Generally, corporate officers, shareholders and others who have the responsibility for withholding and paying over payroll taxes can be held personally responsible for the trust fund portion of the payroll taxes if they willfully fail to pay these amounts to the IRS. Sometimes business owners who are undergoing tough financial times are tempted to take this risk. In my experience the thinking is that if a company doesn’t pay its vendors it will be out of business in short order. On the other hand the IRS tends to be slow about insisting on payment, and it can be months or even years in some situations before the IRS gets serious. Based upon this analysis the business owner decides to take a calculated risk, and hope that business picks up before the IRS shows up.
Jack Easterday found out the hard way that the stakes can be very high indeed. Mr. Easterday was convicted of willful failure to pay over employee payroll taxes in violation of Internal Revenue Code Section 7202. Mr. Easterday’s conviction was upheld by the Ninth Circuit Court of Appeals. United States v. Easterday. The extremely scary part of the decision by the Ninth Circuit was that the Court held that Easterday was guilty even though he may have been able to prove that the company didn’t have sufficient funds to pay the payroll taxes.