The word "willful" has a special meaning when the IRS uses it. They usually mean you are evading your taxes on purpose, but it can even mean that if evasion wasn’t really your first purpose, you should have known better. This is where many people can be caught off guard, especially those who are found responsible for willfully failing to pay back payroll taxes.
Let’s say, for instance, that you are in the accounting department of XYZ Corporation. It is your responsibility to figure out the amounts of tax to withhold from the employees on payday. You do the figures and withhold the amounts, but the business account doesn’t have quite enough to deposit the figured tax amount into the separate account that is (supposed to be) there for that purpose. You do know one of the business’s big clients has an outstanding invoice due soon. So you make a mental note to use that to cover the amount that’s supposed to go into the tax trust fund account.
Unfortunately, the big client was actually in debt and they’ve been shut down, so they fail to make that big payment you were expecting. Your tax account is left high and dry. On top of that, your equipment vendors start getting after you about the outstanding bills you have not paid to them yet. Greasing the squeakiest wheel is your first priority for now.
In your view, you never intended for the IRS account not to be paid. You fully expected to be able to cover it. Will the IRS find you "willfully responsible" for failing to pay those delinquent payroll taxes? You bet! But you work for a corporation, you protest. That doesn’t help in this case. When it comes to Back Payroll Taxes, the IRS will go after individuals to cover the amounts due.
Only two conditions need to be met in order for the IRS to proceed against you, as an individual, for owing IRS Back Payroll Taxes. One is that you must be "responsible", that is, you have the explicit duties to account for the taxes due, collect them, and pay them over to the government. When you figured out and withheld the amounts from the employee checks, you accounted for and collected. If all had gone to plan as you expected, you would have had the funds to write the check to the Treasury on time; that was your duty.
The second condition is the "willful" part. The definition here is: “intentional, voluntary, reckless, knowing (not accidental). No evil intent or bad motive is required.” When you chose to wait for the client invoice to be paid, you clearly made an intentional, voluntary choice to leave the trust fund account for later. You may not have realized you were being reckless, but you did know, and the IRS contends you should have known better.
If you find yourself in a situation like this, the IRS will attempt to assess a Trust Fund Recovery Penalty by using the technical device of a 4180 interview, and it is no small matter. If you need assistance with a payroll tax issue, contact us for a free, confidential consultation.
