Outside Accounting Firm Found Liable for Responsible Person ...

The IRS casts a wide net when trust fund taxes for payroll go unpaid and in the case of Erwin v. United States v. Coggin, et al, United States District Court for the Middle District of North Carolina, 2013 TNT 26-15 the outside accountants for a client ended up being held responsible for the unpaid taxes.

Buddy Light Accounting was a company that would perform various accounting services for customers.? Those services included in the matter at hand:

• Managing accounts payable
• Handling payroll including
  • Computing payroll tax liabilities for each employee
  • Computing payroll deposits to be made
  • Preparing the Form 941
  • Making payroll tax deposits

The Light brothers ran Buddy Light Accounting and performed the services in question.? The Light brothers were given the authority by the client to make the payroll tax deposits via electronic transfer without receiving signatures or authorizations from any other party.? The brothers obtained employee information directly from the client?s servers and were the first individuals to actually know what the payroll tax deposit due would be each time.

Eventually the company ran short of funds and insufficient funds existed to make a payroll tax deposit.? The brothers informed the client that insufficient funds existed to pay employees, vendors and the taxes, including meetings with the client to go over the problem.? The Light brothers prepared payment plans and submitted them to the IRS on behalf of the client.

However, the client informed the Light brothers to continue issuing payroll checks and pay other vendors in preference to the IRS.? They also received, from time to time, instructions to make payments to the owners that the Light brothers knew would deplete funds so that payroll taxes could not be paid.

Knowing this, the brothers nevertheless complied with the instructions, paying employees, the owners and even taking their own fee of $4,900 each month when it came due.

The Court found that the Light brothers were responsible parties.? They had the authority directly to see that payments were made, yet they did not take such actions.? Similarly, they continued to make payments to other parties (including their own accounting firm) knowing taxes remained unpaid. So they both had the authority to make payments (thus were responsible parties) and allowed payments to be made to other vendors when the taxes remain unpaid (thus showing willfulness).

What should the Light brothers have done?? While the case may suggest that they should have just ignored the client?s instructions and made the transfers, that would amount effectively to unauthorized transfers of funds that weren?t theirs?not a good result.

No, the problem was continuing to hold that power once they were aware that there were unpaid taxes and that the client was not willing to give payment of those liabilities preference.? It also clearly doesn?t help when the accountant goes ahead and takes his own fee as one of those paid in preference to the IRS.

At the end of the day, continuing to receive $4,900 per month for a few months ended up costing the Light brothers over $650,000.

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Source: http://ascpa.wordpress.com/2013/02/08/outside-accounting-firm-found-liable-for-responsible-person-penalty-for-trust-fund-taxes/

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