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Could you be personally liable for unpaid withholding taxes?

Seinfeld fans may remember a reference to a character on the show named Al Yeganeh, nickmaned the “Soup Nazi.” The reference actually has a counterpart in real life: A business in Staten Island called Soupman, Inc. licenses the name and recipes of that Seinfeld character.

The show certainly provided free marketing and brand promotion to the business. Unfortunately, a recent tax controversy is providing a different sort of notoriety for the company.

According to an Internal Revenue Service indictment, the company failed to pay withholding taxes. The tax crimes include failing to pay Medicare, Social Security, and federal income taxes. If convicted, the CFO of the Soupman, Inc. chain could face up to five years in prison. In addition, there are substantial tax penalties associates with the unpaid taxes.

Employment taxes include amounts allocated for withholding, Medicare, Social Security and unemployment compensation. The IRS expects employers to pay these taxes on behalf of their employees. Business owners who fail to turn over these taxes could be held personally liable. In fact, Section 6672 of the Tax Code authorizes the IRS to go after a business owner individually for unpaid withholdings. That could mean personal assessments against all “responsible persons,” defined as the individuals who have ownership or signatory authority over a company and its payroll functions.

As a tax law firm that has represented businesses of all sizes, we understand that responsibility for payroll decisions, including writing payroll checks, does not automatically implicate personal liability. In fact, Section 6672 requires a showing of a willful failure to turn over to the IRS the withholdings from employee paychecks. Our lawyers work hard to hold the IRS to that evidentiary showing.

Source: Forbes, “'Soup Nazi' Tax Evasion Case Holds Lessons For Every Business,” Robert W. Wood, May 24, 2017

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