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Lessons learned the hard way: why employers should use EFTPS to check their payroll tax deposits

January 26, 2011

EFTPS.JPGWe mentioned yesterday a sad story about small businesses allegedly swindled by their third party payroll provider. But keeping your payroll in-house doesn't always keep you out of payroll tax trouble either, as a case decided yesterday against a Des Moines businessman shows.

The businessman owned a distribution company. Somehow the company got behind on its payroll taxes, but the owner apparently didn't find out until he asked his outside accountant to respond to notices from the IRS looking for the taxes. Then, according to the court, the owner made what proved to be a terrible mistake -- he paid other creditors ahead of the IRS.

Last February a U.S. district court judge in Des Moines ruled that paying the other creditors was a "willfull" act that triggered personal liability for the owner, Charles Colosimo, as a "responsible person." The Eighth Circuit Court of Appeals upheld the decision yesterday. The appeals ruling explains (citations omitted):

"The term willfully does not connote a bad or evil motive, but rather means a voluntary, conscious, and intentional act, such as the payment of other creditors in preference to the United States." Willfulness is generally a question of fact, but if a responsible person knew of payments to other creditors after he was aware of the failure to pay over withholding taxes to the government, his actions are willful as a matter of law.

Being surprised by a bill for unpaid payroll taxes is a severe, sometimes even fatal, blow to a business. It's even worse if you are a "responsible party," because that follows a responsible party even if the business was incorporated. That's why business owners should know how to use the Electronic Federal Tax Payment System to check online to make sure their payroll taxes are current.

Cite: Colosimo, CA-8, No. 10-1593
Link: Prior Tax Update coverage.

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