ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – DO MEMBERS OF A CORPORATION’S BOARD OF DIRECTORS HAVE EXPOSURE TO THE IRS TRUST FUND RECOVERY PENALTY?
By Robert S. Schriebman
Membership on a Board of Directors is often a badge of honor, and a reward for many years of faithful service. Several years ago Congress amended the Internal Revenue Code to prevent the IRS from issuing Trust Fund assessments to volunteer members of the boards of charities. But what happens when board members, who are not officers, take an active part in the management of a “for profit” corporation or LLC that fails to pay its payroll taxes.
On December 11, 2018 the US District Court for the Southern District of Texas came down hard on non-officer board members and affirmed IRS Trust Fund assessments against them. (US v. Ulasi, 2018-2 U.S.T.C. Para 50, 517). In this article we will discuss the Ulasi case and how these directors became exposed to the Trust Fund Recovery Penalty (TFRP).
The Basics of TFRP
Businesses are required to withhold from employees’ earnings the amount each worker owes for “employment taxes,” i.e. Social Security and Income Taxes. These rules are found in IRC §§ 3102 and 3402. Under IRC § 7501 employers hold these employment taxes “in trust” for the Treasury Department. Therefore, these federal statutes make every employer an involuntary trustee for Uncle Sam.
The rules relating to TFRP assessments are found in IRC § 6672. Employers are required to do three things: 1) Collect; 2) Account for; and 3) Pay Over any and all payroll taxes on a timely quarterly basis.
In order for the IRS to successfully assert the TFRP, the IRS must show that the target for the assessment is a responsible person who willfully failed to pay over these payroll taxes. Once the IRS targets a responsible person, the burden of proof is on that targeted individual to disprove that he/she was in fact responsible and that his/her failure was not willful.
The Ulasi Case
Ulasi, and two other individuals, founded Jubilee Group Home, Inc. to provide healthcare to individuals with intellectual disabilities. In the typical game plan, a corporation’s board of directors (B/D) elects or appoints officers to handle company management and administrative functions. The directors usually do not get involved in the day-to-day fiscal affairs of the enterprise.
These three directors did not open bank accounts and they did not sign the usual bank documentation showing authorized signatures for check signing authority. One of the first things the IRS looks for, in finding responsible persons for the assessment of the TFRP, is to determine whose signatures are on the bank records. Indeed, I have gotten people off of TFRP exposure by proving that they were not authorized to sign checks.
Ulasi, and his fellow board members were not signatories on the corporation’s bank accounts, but this factor made no difference to the Court. You see, the IRS proved that Ulasi and the other directors made managerial decisions such as what creditors to pay, as well as the hiring and firing of employees. These factors showed sufficient involvement in the corporation’s daily fiscal affairs.
Citing other federal cases, the Court held that a targeted individual can be a corporate officer; a member of the B/D; a substantial stock holder; one who manages the day-to-day operations of the business; a person who has authority to hire or fire employees; a person who makes decisions as to the disbursement of funds and payment of creditors; and a person who possesses the authority to sign company checks.
The Court ruled that Ulasi, and other members of the B/D, had substantial input into the decision making process and other management functions. One B/D member argued that he was unaware of the company’s debt to the IRS, and should be absolved from TFRP exposure. Nevertheless, the Court held that ignorance was no excuse.
The Court further found that the members of the B/D made conscious decisions to pay other creditors even though they were aware of unpaid IRS taxes. This constituted evidence of the second criteria – willfulness. A responsible person’s decision to pay salaries, utilities, rent, and outstanding loans after learning of the corporation’s payroll tax debts shows willfulness.
As I said at the beginning of this article, one is often honored and flattered to be appointed a member of a corporation’s Board of Directors. In cases where the corporation is a recognized tax-exempt entity under IRC § 501, there is a degree of federal immunity. (Incidentally, this immunity does not extend to the EDD). However, for “for-profit” corporations and LLCs there is no immunity. The fact that these directors do not sign checks does not provide much comfort – let the director beware.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the Federal and State governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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