A case involving embezzlement, tax liability, and good intentions added up to a nightmare for one man. Dr. Robert McClendon’s story proves there’s no amount of caution too intense when it comes to payroll tax liability.
IRS Mistakes Cost Big (Even When They’re Not Your Fault)
In a sobering case reported in Forbes, a man who loaned $100,000 to a struggling business was fined $4.3 million for said company’s payroll tax liability. When you dig into the details, it’s not as unfair as it may seem at first blush, but that doesn’t make the situation any less painful for Dr. McClendon—the defendant and a legally-deemed responsible party. As the Forbes article states, “You can be ‘willful’ under the tax law even if you didn’t have a bad motive or evil intent.”
So what was the kiss of death for Dr. McClendon?
Responsible & Willful: A Mismatch of Million-Dollar Proportions
Dr. McClendon owned the business to which he loaned the money and the cash went toward the seemingly noble goal of paying employees to prevent shuttering the doors altogether. While it was an employee who’d embezzled the funds earmarked for payroll taxes, the case against Dr. McClendon was strong enough to prove him responsible and willful. He wasn’t responsible for the embezzlement but he was responsible for choosing to pay employees instead of the payroll taxes, which by that time, he knew about. The case against Dr. McClendon withstood the legal tests and left the doc to nurse his own wounds. Ouch.
How to Protect Yourself
Either learn the rules of payroll taxes and precisely follow them or hire a qualified company to do it for you. One benefit to hiring a payroll service is that hiring a payroll service takes the burden of having to understand all of the rules off of company leadership. The payroll service takes on the liability and frees up the small business to focus on business.
The Bottom Line
There are too many ways to get in trouble with the IRS to choose ignorance. With fines and possible jail time on the line, legitimate small businesses must take payroll taxes seriously. The government sure does.