Tag Archive for: employer

The IRS’s Trust Fund Recovery Penalty: A Perilous Trap for the Unwary

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Under the Internal Revenue Code (the “IRC”), employers must withhold certain taxes from employee pay. These monies are referred to as “trust fund taxes” because they are held in trust on behalf of the government, and employers must turn these withheld amounts over to the government on a regular basis.

For various reasons, employers sometimes fail to remit these trust fund taxes to the government when they are supposed to. For example, struggling businesses facing challenging financial decisions as to which creditors will be paid to keep the business afloat, may fail to pay withheld taxes and instead “borrow” from the government to pay other creditors first. This may be a perilous path not only for the employer but also for individuals within the organization who have decision-making authority. While other creditors may have to rely on veil-piercing concepts to collect the company’s liability from anyone other than the company, the federal government does not.

To allow the IRS to collect, Congress authorized § 6672 of the IRC which allows IRS to collect directly from the personal assets of certain control individuals. As was stated in Wright v. United States, “[t]he statute is harsh, but the danger against which it is directed—that of failing to pay over money withheld from employees until it is too late, because the company has gone broke—is an acute one against which, perhaps, only harsh remedies are availing.” 809 F.2d 425, 428 (7th Cir. 1987).

In a nutshell, § 6672 provides that any person required to collect, account for, and pay any tax imposed under the IRC who willfully fails to do is liable for a penalty equal to the total amount of the unpaid tax. Thus, liability under § 6672 attaches if an individual both (i) qualifies as a “responsible person”; and (ii) “willfully” fails to pay over the amount due.

Section 6672 has been interpreted by the courts quite broadly to encourage individuals to stay abreast of their companies’ withholding and employment taxes. As such, the penalty has ensnared many an unsuspecting charitable board member, officer, bookkeeper, accountant, investor, or other person associated with a taxpaying organization. Thus, it is important for anyone in such a position to bear in mind that their title carries significant risk. Even where such a person is completely non-complicit in the discouraged activity, they may still bear the burden of mounting a legal defense against IRS claims.

It is also important to understand that each such responsible person is liable for 100% of the trust fund recovery penalty. Perhaps the only significant limitation on the IRS’s latitude is that, while it may assess any and all responsible persons until the amount due has been paid, it can collect the tax due only once. Also, IRS claims preempt state law, rendering for example, creditor protections for homestead real property inapplicable.

While the government bears the burden of proving that the taxpayer is a responsible person, taxpayers bear the burden of proving a failure was not willful. Willfulness has been defined as the “voluntary, conscious, and intentional decision to prefer other creditors over the United States.” Ruscitto v. United States, 629 Fed. Appx. 429, 430 (3d Cir. 2015).

Illustration by legal assistant Charles Jackson

The willfulness requirement is satisfied when the responsible person makes the deliberate choice to pay the withheld taxes to other creditors, instead of paying the government. Where the responsible person does not segregate the trust fund taxes but uses them to cover operating expenses (such as employees’ wages and claims of other creditors), each payment may be a voluntary, conscious, and intentional decision to prefer other creditors over the government. This requirement is satisfied with something as simple as making payroll. Thus, in most business scenarios, negating willfulness can present a significant challenge.  Importantly, § 6672 is a civil, and not a criminal, statute. Its criminal analogue, § 7202, requires the additional concept of “known legal duty” to comply with due process of law requirements under the Constitution. However, no such requirement is associated with § 6672, so it is much easier for the government to meet its burden of proof.

To sum up, it is absolutely critical for all control persons within any taxpaying organization (including nonprofits and government entities, which are nonetheless subject to withholding requirements and employment taxes) make themselves aware of applicable deadlines and other procedural requirements. Failure to do so can result in life-altering penalties being assessed against personal assets including homesteads and other property which is generally considered exempt from creditor claims. Could you write a personal check for 100% of your organization’s employment taxes?

If you have questions regarding the Trust Fund Recovery Penalty or are facing other IRS issues, please reach out to FGHW for a consultation.

Christian Kelso | Farrow-Gillespie & Heath LLP | Dallas, TX

Christian S. Kelso, Esq. is a partner at Farrow-Gillespie Heath Witter LLP.  He draws on both personal and professional experience when counseling clients on issues related to estate planning, wealth preservation and transfer, probate, tax, and transactional corporate law. He earned a J.D. and LL.M. in taxation from SMU Dedman School of Law.

Two Major Developments for Employers

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Employment law has seen two recent major developments that affect employers. The first involves nondisclosure limitations in sexual harassment settlements. The second rewards employers who conduct internal wage and hour audits.

Recent Development #1: New Tax Law Nondislosure Limitations

One of an employer’s primary motivations in resolving an employment claim is to obtain the employee’s promise to keep the settlement and the allegations underlying the claim confidential. The recently-passed federal tax law may interfere with an employer’s interest in maintaining the confidentiality of such agreements.

In response to the recent “me too” movement, Section 13307 of the tax law (signed December 22, 2017) disallows tax deductions for an employer’s payment of a sexual harassment or sexual assault settlement if the settlement is subject to a nondisclosure agreement. The deduction restriction applies not only to the settlement amount, but also to the employer’s payment of related attorneys’ fees. While many experts predict some modification of the provision, employers should be mindful of this deduction restriction when considering whether to resolve a claim of sexual harassment or sexual assault.  Until the provision is revised, an employer either should negotiate any confidential settlement agreement with the understanding that the payment will not be tax deductible, or should resign itself to having no nondisclosure provision in the agreement.

Recent Development #2: DOL Payroll Audit Independent Determination Program

On March 6, 2018, the U.S. Department of Labor (DOL) announced a new pilot program aimed at providing employers with an opportunity to voluntarily correct payroll errors that may have resulted in inadvertent violations of the Fair Labor Standards Act (FLSA). Recognizing that employers who discover a failure to pay overtime or the misclassification of employees are often hesitant to take corrective action because of potentially expansive liability exposure, the DOL has adopted the Payroll Audit Independent Determination (PAID) program. The program allows employers to avoid potential litigation and liquidated damages by conducting internal audits and self-reporting any violations to the DOL.  DOL’s Wage and Hour Division (WHD) will assist employers in correcting mistakes and will facilitate the exchange of back wages payment for enforceable releases of liability from the affected employees.

The WHD plans to implement the PAID pilot program nationwide for six months, then evaluate the results. The PAID program is not available to settle ongoing FLSA litigation and is not accessible to employers with recurring violations.

For more information regarding either of these new developments, contact Julie Heath.

Julie Heath | Farrow-Gillespie & Heath LLP | Dallas, TXJulie E. Heath practices primarily in the area of employment litigation and counseling. In addition to litigation and arbitration defense, she counsels HR departments and businesses of on all aspects of employment law. Julie has been named to the list of Texas Super Lawyers (a Thomas Reuters service) in every year since 2012.

Employment Law | Farrow-Gillespie & Heath LLP

Employment Law Update: New DOL Rule Suspended

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Employment Law | Farrow-Gillespie & HeathA federal court in Texas has ruled that there is a substantial likelihood that a proposed new DOL rule that increases the threshold salary for exempt employees violates the law. Earlier this year, the Department of Labor published new rules, one of which raised the threshold salary for exempt employees from $23,660 to $47,476. The Texas court issued an injunction preventing the new overtime rules from going into effect. The rules were to have taken effect on December 1 of 2017. The DOL likely will appeal the ruling to the Fifth Circuit Court of Appeals, and the issue may go all the way to the Supreme Court. But for now, implementation of the new salary threshold rule for exempt employees is on hold. The decision, along with a new administration, makes it unclear whether and when the new rules will take effect. How should employers respond to the ruling?

  • Nothing in the injunction prevents you from moving forward and changing compensation plans for some employees—raising some salaries or converting them to hourly nonexempt status.

  • If you want to hold off on increasing an exempt employee’s salary but keep him or her in an exempt status, you can. Right now, the injunction leaves in place the old salary basis test. If the injunction is lifted, you may have to implement some changes quickly—so you will need to pay attention to the legal news.

  • If you want to change some of your formerly exempt folks to nonexempt hourly status, you can. Paying someone on an hourly basis is always okay as long as you pay required overtime.

Employment Law | Farrow-Gillespie & Heath LLP

Affordable Care Act Information for Employers

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The Affordable Care Act is a federal statute that creates new responsibilities for employers. Employers who have fewer than 25 “full-time equivalent” employees can qualify for a small business health care tax credit if they pay at least 50% of the employees’ health insurance premium costs and offer coverage through the Small Business Health Options Program (“SHOP”) Marketplace. Larger employers face new requirements to insure their employees—and steep penalties, should they fail to comply with the requirements. In 2015, employers with 100 or more full-time equivalent (“FTE”) employees must offer coverage to 70% of those employees and their dependents. And beginning in 2016, all employers with 50 or more FTE employees must offer coverage to 95% of those employees and their dependents.

For an employer to determine whether it comes within these new requirements, the employer must first calculate its number of full-time equivalent (“FTE”) employees. Each employee who works 30 hours or more per week, over at least 120 days per year, is a full-time employee. But hours worked by part-time employees also add to the FTE number; if, for example, five part-time employees work a total of 60 hours per week, their employer would need to add two FTE employees to its total. Notably, affiliated companies may be treated as a single employer under the Act.  As a result, three companies each having 20 FTE employees could either: 1) qualify for small business health care tax credits, if they are treated as three separate employers; or 2) be subject to the employer coverage mandate, if they are sufficiently connected to be treated as a single employer.  It is therefore particularly important that companies who share ownership or control, or who otherwise coordinate their business activities, consult with counsel to determine their employer status under the ACA.

Once an employer confirms that it is subject to the employer mandate, it has more decisions to make. For each year that the employer does not offer any insurance coverage to its employees, it will face a $2,000 penalty per FTE, minus the first 30 employees (or, in 2015, minus the first 80 employees). To avoid such penalties, the employer should offer its employees an “affordable” plan that provides “minimum value” under the ACA. These calculations are complex. Generally, “minimum value” requires that the employer pays at least 60% of the plan’s costs, and “affordable” requires that an employee’s premiums cost no more than 9.5% of his or her household income. If the employer’s plan is deemed to not provide minimum value, or to not be affordable, the employer will be fined $3,000 for any full-time employees who receive federal premium subsidies for marketplace coverage. Some employers may, nevertheless, opt for “skinny plans” that may not meet the required minimum essential coverage under the Act, but which will avoid the $2,000-per-employee penalty and reduce coverage costs.

For more information about how the Affordable Care Act may affect your business, please contact board-certified health care attorney Scott Chase or employment lawyer Julie Heath.