US company secretary wins IRS payroll case - and has them pay legal costs

The Tax Court ruled that the employee should not be held personally liable for her company’s unpaid payroll taxes.

A US employee has proven in court that she should not be held personally liable for her company’s unpaid payroll taxes – and got the Internal Revenue Service (IRS) to cover her legal costs at the same time.

In the case of Fitzpatrick v Commissioner, TC Memo 2017-88, US Tax Court, 2017, the defendant was prosecuted under tax code Section 6672. This clause enables the IRS to assess someone personally for 100% of their employer’s undeposited payroll taxes if they are deemed to be a “responsible” person who “wilfully” failed to deposit those taxes.

A responsible person is someone with the authority to sign cheques, but they do not need to either be a corporate officer or the company’s sole responsible person. Paying other creditors before the IRS, meanwhile, qualifies as wilfully failing to deposit payroll taxes.

According to the information the IRS officer had when determining the defendant’s liability, she was a responsible person because she had invested in the company, opened bank accounts as secretary for it and was authorised to sign cheques. She also monitored the organisation’s bank account, contracted with a third party payroll provider and authorised some expenditure.

But during her trial at the Tax Court, the employee offered credible proof that she made no operational decisions for the company. The Court found instead that she was mainly responsible for delivering cheques, relaying electronic bank account balances and delivering mail sent to her private post box.

When the defendant asked that the IRS pick up her legal costs, she was awarded the statutory rate of $200 per hour.