Employment Tax Debt

Notices have begun arriving from the IRS inquiring about 941 payroll tax deposit(s)? In your head the proverbial ball begins rolling with all the “what-ifs” that you can come up with as you ponder your next move. Did you simply forget to file your payroll returns? Did you not bother to file your payroll returns because you couldn’t afford to pay the taxes? Are you making payments on old taxes and forgetting about a current tax dilemma? If you’re making payments to the IRS on previous payroll taxes, are you making the right type of payment?  Will you qualify for an Installment Agreement or an Offer in Compromise? Will this issue simply go away?

If you wait too long, you may lose your rights to challenge the tax assessment.

Business owners are required to withhold the appropriate amount of income and other taxes from their employee’s paychecks. When the taxes are collected and placed into a trust account, the employer is required to periodically send the collected payments to the IRS. Upon the completion of individual worksheets for each employee for the withholding of the correct federal and state income taxes from each pay period, employees trust and rely on their employers completely to withhold payroll taxes and disburse those withholdings to the IRS and state through proper channels. Additionally, the employer is required to pay 7.65% in employer payroll taxes for such things as Social Security and Medicare. A business’s failure to correctly file and disburse monies for payroll taxes is legally considered theft from the employees of the business. This will lead to aggressive collection actions from the IRS and state tax agencies. Failure to file payroll taxes and pay payroll taxes can be considered a Federal offense and the IRS can refer the case to its Criminal Investigation Division – directly tied to the Department of Justice.Felony convictions can be the result of employers using the payroll tax money for personal use and personal creditors instead of “for the sake of the business”. Businesses can be shut down and company property, inventory, machinery, and other assets may be seized to replenish the “stolen” and missing payroll taxes. The penalties can be enormous.

The IRS continues to use its Enforced Collection when it comes to unpaid payroll taxes and payroll returns that go unfiled. Enforced Collection can include liens and levies on business assets such as accounts receivables, equipment, company vehicles and business bank & asset accounts. The IRS is also able to close a business for non-payment of payroll taxes. Should the business take the step of filing for bankruptcy protection, the IRS will respond with its next step of looking to the owner(s) of the business for collection of interest, penalties, taxes, and trust funds. For corporations and partnerships, the IRS will look to the person designated as responsible for paying the payroll taxes to collect the delinquent trust funds. The IRS refers to this as the Trust Fund Recovery Penalty.

The responsible person in a company? The IRS looks to the person, or group of people, with the duty to perform and the power to direct the collecting, accounting, and paying of trust funds. The person, or people, in question can be an officer or an employee of a corporation, a member or employee of a partnership, a corporate director or shareholder, a member of a board of trustees of a non-profit, or another person with the authority and control to direct the receiving and disbursement of funds. The IRS is authorized to assess penalties against anyone who is deemed responsible for the collecting and paying withheld income and employment taxes, and who willfully fails to collect or pay them. The IRS distinguishes that the responsible person(s) must have known about the unpaid taxes and chosen to use the collected funds to keep the business going or allowed available funds to be used to pay bills – or to line the owner(s)’s pockets.

The Trust Fund Recovery Penalty is found under IRC Section 6672(a) is referred to as the 100% penalty based on the monies that the taxpayer took from the employees’ trust and didn’t pay to the government tax agencies. It states “[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such a tax, or truthfully account for or pay over such a tax , or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”

Additionally, payroll taxes and penalties are not dischargeable through the bankruptcy procedure.