The IRS may, in fact, impose the “trust find penalty” on an individual for failing to pay over the required amount. Although the IRS usually prevails in court on this issue, the taxpayer in a new case, Preimesberger, E.D.C.A, Case No. 1:19-CV-1441 AWI SAB, 8/5/20, avoided the penalty because he was following other legal procedures.
Background information: If payroll taxes aren’t remitted to the IRS in time, the “responsible party” may be held personally liable for the full amount of the unpaid tax. In other words, if you’re a manager or the person who handles the company’s finances, you might have to pay the IRS an amount equal to 100 percent of the shortfall out of your own pocket. For this reason, the trust fund penalty is frequently called the “100 percent Penalty.”
Note that it doesn’t take much to be held a responsible party. It could be anyone who is responsible for collecting or paying payroll taxes and willfully fails to do so. The IRS also takes a broad view of what constitutes a “willful failure.” For instance, the penalty may be assessed against a supervisor or officer who knew or should have known about the unpaid tax.
Facts: The taxpayer in the new case was the manager of five skilled nursing home facilities in California. He owned less than 10 percent of the company stock and was employed by each facility to operate their skilled nursing activities.
The overwhelming majority of each facility’s revenues was derived from patients covered by Medicare and/or Medi-Cal. Thus, each facility’s cash flow was dependent on timely reimbursement payments from those organizations. Beginning in 2010 and worsening through 2015, the facilities experienced serious cash flow problems, primarily as a result of delays and disruptions in Medicare and Medi-Cal reimbursement payments.
From 2010 through 2015, the Facilities accrued substantial Medicare and Medi-Cal receivables due from the U.S. government. Eventually, the facilities were unable to pay all of their operational expenses.
The taxpayer initially enabled the company to bridge the cash flow gap by drawing on a line of credit. However, although the company requested that the funds be used to pay all of the wages of the facility employees (i.e., net wages and withholding taxes), the lender only authorized and provided funds for the payment of net wages. As a result, the facilities were unable to pay all of their withholding tax obligations.
Unlike a typical business, such facilities can’t simply cease operations when they can no longer pay their employees’ net wages and the necessary withholding taxes. Under state and federal regulations, nursing homes/skilled nursing facilities in California must follow lengthy and detailed procedure for closure that includes notification to each facility’s residents and appropriate governmental agencies and transferring residents to other appropriate facilities.
In the interim, a nursing home/skilled nursing facility is required to remain open and maintain the existing standard of care for all residents. Failing to follows these regulations could result in civil and criminal penalties.
The IRS assessed the trust fund penalty against the taxpayer because he was a responsible party. It said that the failure to pay the IRS ahead of other creditors was a willful failure. But now the district court in California has sided with the taxpayer.
Tax reprieve: State and federal laws required the nursing home continue to provide quality care to the patients. The manager had to use bank funds to pay expenses in order to comply with those laws. In the view of the court, this absolved him of the trust fund penalty.
More often than not, taxpayers won’t be able to wriggle out of a payroll tax mess. Make sure your clients fulfill their obligations without exposing themselves to the harsh trust fund penalty.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...