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Operating a business in corporate form usually protects the individual owner from personal liability for corporate debts. However, the "corporate shield" is pierced in cases involving unpaid payroll taxes. All employers are required to withhold federal income tax and Federal Insurance Contributions Act (FICA) tax from employees' wages. The withheld taxes are held in trust for the federal government and are generally referred to as "trust fund taxes."1
When a corporation fails to remit the withheld taxes to the government, the IRS looks through the corporation to the individual or individuals who are responsible for the failure. Once the IRS has identified a "responsible person" or persons, those individuals will be held personally liable if the IRS determines that the failure to pay was willful, and a penalty will be assessed against the responsible person in an amount equal to the unpaid trust fund taxes.2 The trust fund recovery penalty also known as the 100% penalty) applies to the failure to collect, account for, and pay over thirdparty taxes, but not to taxes that are paid directly, such as the employer's share of FICA taxes or to penalties or interest owed on the delinquent trust fund taxes.3 For purposes of the penalty, a person is defined to include an "officer or employee of a corporation" who is "under a duty to perform the act in respect of which the violation occurs."4 The purpose of the penalty is to encourage prompt payment of the withheld taxes and to ensure they will be collected from a secondary source.
The IRS and the courts have taken a broad view of who is a "responsible person." Such a person has been described as an individual who has ultimate authority for the decision not to pay the trust fund taxes;5 effective power to pay the taxes;6 authority to direct payment of creditors;7 significant control or authority over the business finances;8 or control over allocation of funds.'
Attempts to defeat the label of responsible person have been largely unsuccessful even when other people act with malfeasance or other parties could also be held liable. Embezzlement of the trust fund taxes by one officer did not relieve another officer of liability,10 nor did the embezzlement of the trust fund taxes by...