Taxpayer can’t sue employer for withholding taxes


The U.S. Court of Appeals for the 9th Circuit recently upheld a district court’s decision in dismissing an employee’s suit against his employer for withholding payroll tax.

Internal Revenue Code Section 3403 statutorily bars suits by employees against employers for tax withheld. The employee’s suit in this case was also barred by the Anti-Injunction Act, which prohibits suits for the purpose of restraining the assessment or collection of any tax. The employee did not meet any of the exceptions to this act.

The facts of the case say that Michael Schagunn, an employee of USF Reddaway, Inc., an Oregon corporation, was having federal payroll taxes withheld from his wages. He was a tax protestor who had brought up a number of frivolous reasons why federal payroll taxes should not be withheld from his wages, none of which were valid.

Schagunn ended up suing his employer, USF Reddaway, and the employer’s payroll clerk, Sherly Gilland, both personally and as the corporate payroll clerk. He sued for $147, 343.40 in withheld taxes and $12 million in various forms of damages.

The rules are very specific regarding the withholding of federal payroll taxes. The employer is required by IRC Section 3403 to withhold the taxes. The code section expressly provides that an employer is liable to the IRS for the payment of tax withheld and shall not be liable to any person for the amount of any such payment. This code section made it mandatory that the court dismiss the suit against the employer (Michael Steven Schagunn v. Sherly Gilland and USF Reddaway, Inc., U.S. Court of Appeals, Ninth Circuit, 2015-2 U.S.T.C. (Sept. 21, 2015).

If that were not enough, the Anti-Injunction Act prohibits suits for the purpose of restraining the assessment or collection of any tax.