Alert Your Employer/Clients * Payroll service theft no excuse

While the facts of this case may sound far out, the point it makes is immediate and important.

K Inc., a C corp, used a payroll service. K sent the service funds to pay employment taxes via EFT and the service’s bank deposited them with the IRS. In 2009, K discovered its payroll tax deposits had been embezzled by either the service or its bank as early as 2007, so it filed a crime report in 2011. K paid the overdue taxes but challenged the IRS penalties for failure to pay them.

Held: For the IRS. The taxpayer claimed it did all it could to comply with its responsibilities: it made funds available and transferred them on time. The taxpayer had used the same service for decades without any problems and could not anticipate that money would be stolen. Penalties for late filing or payment of employment taxes can be waived for reasonable cause if there is not willful neglect. But a taxpayer must demonstrate that it could not meet the deadline despite exercising ordinary business care and prudence. There is an unambiguous duty to file returns and pay the taxes. This duty cannot be avoided by claiming reliance on an employee, agent or

Penalties for late filing or payment of employment taxes can be waived for reasonable cause if there is not willful neglect. But a taxpayer must demonstrate that it could not meet the deadline despite exercising ordinary business care and prudence. There is an unambiguous duty to file returns and pay the taxes. This duty cannot be avoided by claiming reliance on an employee, agent or another person, no matter how reasonable it was to assume that person would fulfill the responsibilities.

The court said that relying on a person to perform these duties is different from relying on a tax pro’s advice. Taxpayers cannot escape this responsibility to file returns and pay taxes by delegating it. This taxpayer retained oversight and supervision of the payroll service’s work and was responsible for seeing that the service fulfilled its duties. [Kimdun Inc. v.

[Kimdun Inc. v. United States, Nos. 2:16-cv-01500, 2:16-cv-01558, 2:16-cv-01766, 2:16-cv-02160; C.D. Calif.]

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