Q: I regularly read your column online. Now I need your advice. I was assistant

treasurer of a financial services corporation. My job involved preparing payroll checks and tax returns under direction of the treasurer and his boss, the CFO. I was downsized a year ago, and the company recently filed for bankruptcy. Before I left, I noticed that federal withholding taxes were overdue and told my boss, but he said not to worry about it. But now I've been notified by the IRS that I'm personally responsible for paying them. How could this be possible?

-- Financially Freaking Out

A: First and foremost, since the IRS has notified you of potential personal liability, you need to promptly employ qualified legal tax counsel to protect your rights in this potentially serious matter. Hopefully you have already done this. We'll try to help you by explaining the general legal nature of your problem.

Congress enacted the Trust Fund Recovery Penalty Statute (IRC 6672) to encourage prompt payment of payroll taxes such as social security and federal income tax withholding by employers. Although employers have primary liability to make these tax payments, the IRS can collect a penalty for failure to pay from ''any person'' who was ''required'' but ''willfully'' failed to pay the withheld taxes.

The trust fund recovery penalty, equal to 100percent of the unpaid payroll taxes, is a collection device to protect the government. It can be assessed against more than one person, but only one full payment may be received. The IRS penalty is civil in nature, not criminal. But it can have obviouslyserious financial consequences.

The statute doesn't specify who is the person required to collect, account for and pay the withholding taxes. The IRS manual suggests that nonowner employees who act solely under the control of others, without the power to make independent decisions for the company, are not liable as required persons.

The key to liability is control of finances within the employer corporation. Since you were a corporate officer, you have been targeted for legal responsibility as a ''responsible person'' of the defaulting corporate employer. Cases have interpreted that to include stockholder-owners, directorsand officers who are active in management and personnel decisions. Regardless of the corporate title, the three main criteria are the authority to: control bank accounts, decide to pay bills and sign checks.

Cases have also said that willfully failing to pay is proven by showing that the defendant who fits the responsible person test knows the taxes are due from the company, yet disburses them for other purposes or knowingly fails to pay them to the government.

Now let's analyze where you stand legally. You were a corporate officer as assistant treasurer, but in a subordinate position to both the treasurer and the CFO. If you were told by them what bills to prepare, and you didn't have personal authority to sign payroll checks or tax returns, it's unlikely you pass the responsible person test.

Similarly, your actions don't appear to satisfy the test of willfully failing to pay. Your mere knowledge that the tax payments were overdue without the other ''responsible person'' criteria should keep you clear of liability. But understand that once IRS formally assesses a Section 6672 penalty, you have the legal burden of disproving their claim of personal liability. Good luck with your defense.

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