When you own and operate a business, you must exercise vigilant oversight, including watching over your payroll taxes even when you hire a reputable payroll company because you cannot transfer your responsibility for compliance with tax laws as demonstrated in the Taylor case.
Rodney Taylor (Rodney A Taylor v. Commr. T.C. Memo. 2024-33) entrusted his corporation’s accounting and bookkeeping to Robert Gard, CPA. The CPA steals the payroll taxes. He has the money. Mr. Gard embezzled between $1 million and $2 million, including payroll taxes over several years. The owner, a responsible party, has to pay the payroll taxes to the IRS. It gets even worse because the owner also has to pay the 100 percent trust fund penalty on the W-2 payroll taxes (federal income, Social Security, and Medicare taxes).
Taylor saved Gard’s life when Gard suffered a heart attack while going over the fabricated records with Taylor and Taylor’s financial planner. During his recovery at the hospital, Gard confessed to the embezzlement. Taylor sued Gard and collected $175,000 from an insurance company. Taylor also sued the bank that Gard used in his embezzlement scheme and collected $900,000. But Taylor apparently used none of the settlement proceeds to pay the IRS the embezzled payroll taxes.
Despite Mr. Gard’s wrongdoing, the ultimate responsibility to settle the payroll taxes with the IRS fell on Mr. Taylor as the business owner and “a responsible party” under tax law. He can delegate and did delegate the payroll to Gard, but he cannot delegate his tax law responsible person status.
The Taylor case highlights the crucial lesson that while delegation of duties is a part of business, you cannot transfer your responsibility for compliance with the tax laws. You could take two proactive steps to protect your business:
- Direct oversight. Ensure payroll reports are delivered directly to you, allowing you, a responsible party, the first review.
- Regular verification. Periodically check the IRS electronic federal tax payment system (EFTPS) to confirm that the IRS received payment for the payroll taxes.
By following the two steps above, which take only minutes, you pretty much ensure that no one can embezzle your payroll taxes. If you are the owner of your company, you are responsible for remitting the payroll taxes to the IRS. If you delegate the payroll to another person or an outside vendor, you are still responsible for making sure the IRS has the payroll taxes.
Hiring a tax resolution expert is the best action a taxpayer could take in a tax matter before the IRS or a state tax authority.
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