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IF YOU DON'T REMIT WITHHOLDING, NO EXCUSE IS GOOD ENOUGH FOR IRS

August 06, 2003

Tax practitioners are adept at finding excuses. The official term for these is "reasonable cause." The phrase shows up 163 times in an electronic search of the tax regulations. A good excuse, er, reasonable cause can avoid penalties for everything from taking a flaky deduction to failing to file a return. It's easy to get the impression that no blunder is beyond retrieval, with a good excuse.

A partner in the development of a Des Moines-area subdivision learned otherwise, the hard way, in a recent case. Faced with severe financial difficulties, the developer failed to remit employment taxes to the IRS while paying other creditors.

The partner told the U.S. District Court for Iowa (Southern District) how alleged chicanery by an associate triggered the financial collapse of the partnership. Judge Vietor was unmoved:

"Paying creditors instead of paying over withoholding taxes with the knowledge that the taxes are due constitutes willfulness as a matter of law. (citation omitted). (The partner) acted willfully and is therefore, as a responsible person, liable under I.R.C. Sec. 6672 for the trust fund penalty as a matter of law."

As a result, the taxpayer ended up about $27,000 poorer. The tax law imposes liability for all employment taxes on all "responsible persons." Every responsible person is potentially liable for all employment taxes, even if there are other responsible persons out there.

The Moral: always pay your employment taxes, even if you have to stiff everyone else.

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