Entrepreneurs Take Care: Raiding Employee Withholdings May Send You to Jail

Last month, I posted Your Business is Dead ? Are You Liable for its Obligations?, which stated that, generally, once a business is dissolved, the owners will be personally liable for the business’s obligations only to the extent that the owners received distributions at the time of dissolution.

A significant exception to the foregoing rule, however, concerns company personnel who are responsible for making, but fail to make, withholding payments to the Internal Revenue Service.

26 U.S.C. Section 6672 says, in part, that “Any person required to collect, truthfully account for, and pay over any [income or FICA] tax who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall…be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

Note that this section applies to persons who are responsible for withholding amounts and paying them to the IRS. These persons might include, but are not necessarily limited to, business owners, officers, directors, and accounting or HR personnel.

Note, too, that their personal liability can extend to the total amount of withholdings that the IRS did not receive!

26 U.S.C. Section 7202 is a parallel criminal statute that establishes a maximum penalty of $10,000 and five years in prison.

Significance for entrepreneurs: If your business is in financial trouble, make sure that employee withholdings are forwarded to the IRS. Do not use those withholdings for other purposes such as meeting payroll or paying suppliers – you would be better off filing for bankruptcy protection.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.