Tax Court Backs Personal Payroll-Tax Penalty for Business Owner

A business owner can be personally responsible for a company’s unpaid payroll taxes when he knowingly allows other bills to take priority, according to a recent Tax Court ruling. The case involved a New York company providing specialized construction work with union employees in the New York-New Jersey area. The business also owed union-related benefits and faced financial pressure from a customer that paid slowly.

Payroll-tax payments fell behind in 2015 and 2016. The owner said he did not know the payments had been withheld at first. After learning about the shortfall, he used company funds for employee take-home pay, union benefits and essential vendors. He believed losing union labor would halt projects and threaten the company’s survival. The court still treated that choice as a willful failure because the money went to other obligations instead of the IRS. That triggered the trust fund recovery penalty, which can equal the full unpaid payroll-tax amount and can reach responsible individuals.

The company later resolved its IRS debt through an Offer-in-Compromise in 2020. That agreement also placed a ceiling on the penalty connected with the two years before the court.