Most of us are familiar with employee tax withholdings—the income taxes and Social Security (FICA) taxes that are withheld from each paycheck issued to an employee. These taxes are often referred to as “trust fund” taxes because the employer is required to hold them in trust for the federal government and pay them over to the IRS. If the employer experiences a cash crunch, the trust fund money can look like a perfect place for a short-term loan.
Don’t do it! If you have control over the trust fund taxes and choose to divert them away from the IRS, you will be liable for the entire amount. This is true even if you are merely an employee who receives no financial benefit from diverting the trust fund taxes. Under the so-called “100% penalty,” anyone with authority over trust fund taxes who willfully (i.e., intentionally) diverts them from the IRS will be liable for the entire amount that he or she diverted.
Here is an example of how this works. ABC Corp. distributes widgets in the auto industry. Because a customer is slow on payment, ABC Corp. is not able to pay its supplier on time. The supplier refuses to ship more widgets until ABC Corp. pays up. ABC Corp. has no cash and no line of credit. With no access to product, it is dead in the water.
Janice, the CFO, notices that ABC Corp. has accumulated $10,000 in trust fund taxes which are not due yet. Janice is not a shareholder of ABC Corp., but she is a dedicated and creative employee. To keep the company alive, she uses this money to pay the supplier and purchase more widgets. Janice fully intends to replenish the trust fund account at the earliest opportunity. But in spite of her efforts, ABC Corp. goes bankrupt and is not able to repay the $10,000.
What happens next? Besides losing her job, Janice will be liable for the entire amount of trust fund taxes that she diverted to the pay the supplier. The fact that Janice intended to put the money back does not matter. Neither does the fact that she is merely an employee of the company who did not financially benefit from her action. Because she had authority over the trust fund taxes and chose to divert them to the supplier, she is liable for the entire amount that she diverted.
This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with Jonathan about your situation, please email him at firstname.lastname@example.org or call him at 925-327-1019.