The IRS and the “Other” Trust Account Lawyers Can’t Afford to Ignore

March 5th, 2014 by Lapekas Law Staff

The following was published in the March 2014 Dade County Bar Bulletin

 “State Bars have frequently found that a lawyer’s failure to remit employment taxes

constitutes a violation of professional rules of ethics.”  Karen Lapekas, JD, LLM

A lawyer is only as good as his word, and his license to practice law is only as good as his trust accounting. Month after month the last pages of the Florida Bar News are full of stories of lawyers being suspended or disbarred from practicing law for failing to account for or diverting client trust funds. The stories are consistent reminders of the dire importance of holding inviolate a client’s funds. Not so frequent, however, are the reminders of the trust account many lawyers must maintain for someone who is not their client: the IRS.

Any lawyer who pays wages to employees—including wages to himself—is required to collect and withhold amounts and keep such amounts in a “special fund in trust for the United States.” (Internal Revenue Code § 7501(a)). Lawyers, as employers, are responsible for making either monthly or semiweekly deposits of employment taxes. Employment taxes include (1) employee income tax withholdings; (2) employee FICA tax (Social Security and Medicare) withholdings; and (3) the employer’s share of FICA taxes. The first two amounts, which are withheld from an employee’s wages, are held “in trust” for the IRS and thus referred to as “trust fund taxes.”  Any “responsible person” who willfully fails to collect, truthfully account for, and pay over trust fund taxes, or who willfully attempts to evade or defeat the tax or payment thereof is subject to, in addition to other penalties provided by law (e.g. criminal liability), a “trust fund recovery penalty.” The trust fund recovery penalty is equal to the total amount of tax evaded or not collected, accounted for, and paid over. “Responsible person” is not a defined term, but is generally someone who has authority to exercise control over a company’s finances—regardless of whether he did in fact exercise such control. An employer may have several “responsible persons.” Accordingly, an individual may be liable for the trust fund recovery penalty regardless of whether he is a partner, associate, legal assistant, or bookkeeper.

It is not uncommon for law firms—like any other employer—to fail to timely remit employment taxes. However, unlike other employers’ “responsible persons,” lawyers within the delinquent firm must consider the potential consequences to their professional licenses. State Bars have frequently found that a lawyer’s failure to comply with his employment tax obligations constitutes a violation of professional rules of ethics.

A lawyer’s occasional inability to timely pay income taxes may subject him to tax penalties, but not necessarily compromise his license to practice. This failure may be due to a lawyer’s unforeseen financial, business, family, or health problems. A lawyer’s failure to pay employment taxes, however, may implicate his fitness to practice law. This is an understandable difference. The first is a failure to pay a creditor; the second is a failure to remit trust funds to a beneficiary.

A lawyer who controls, or has the ability to control, the financial decisions of his firm should regularly review the firm’s employment tax obligations. It is not only a wise cost-saving measure, but potentially a career-saving measure as well.