The trust fund penalty sometimes called the 100% penalty, is one of the most onerous federal tax law provisions on the books. Even worse, the IRS and the courts typically don’t grant much leniency to taxpayers.

In a new Tax Court case, Kazmi, TC Memo 2022-13, 3/1/22, a harsh tax penalty was imposed on a part-time bookkeeper that was paid at an hourly rate.

Background: As some of you may know, if payroll taxes aren’t remitted to the IRS in time, an individual determined to be a “responsible party” may be held personally liable for the entire amount of the unpaid taxes. In other words, a company owner might have to pay the IRS an amount equal to 100% of the shortfall out of their own pocket.

But this provision isn’t limited to just business owners or corporate officers. It can be extended to anyone in the company who is responsible for collecting or paying payroll taxes and willfully fails to do so. What’s more, the IRS takes a broad view of what constitutes a willful failure for this purpose.

Facts of the new case: The taxpayer was employed by Urgent Care as a part-time bookkeeper and paid an hourly rate during the tax year in question. He had no ownership interest in Urgent Care nor was he an officer. His name was not on any of Urgent Care’s bank accounts.

Furthermore, the taxpayer didn’t have a check signing authority for Urgent Care or any authority to make payments on its behalf. At all times, he worked under the direction of his immediate supervisor, a physician.

The taxpayer admitted that he handled the company’s payroll in his capacity as its part-time bookkeeper. He was aware that the company had failed to remit its payroll taxes for two quarters in 2014 on time. The total in unpaid taxes exceeded $10,000. Accordingly, the IRS imposed the trust fund penalty on the taxpayer.

Result: After examining all the facts, the Tax Court concluded that the taxpayer was a responsible party under the law and that the failure to remit payroll taxes on time was willful. Despite procedural issues raised by the taxpayer, the Court said that the IRS collections settlement officer acted within their purview. So it upheld the penalty assessed against this part-time worker.

Reminder: The trust fund penalty isn’t restricted to just corporate bigwigs. It can trickle down to employees in lower-level jobs and even part-timers or seasonal workers if they assume responsibility for payroll matters. In short, being forewarned is being forearmed!