Difficult years of keeping heads above water have caused business owners many tax headaches. If you own a business you likely know the feeling of having to handle various bills, putting off suppliers, and having ongoing employment tax payments due the IRS.
You may have found yourself in a position where you have made the choice to avoid tax responsibilities. Maybe you’ve used payroll tax funds to pay something important like rent or to meet payroll.
We’ve helped successfully defend our clients’ businesses, personal assets and freedom in all of the above types of cases. As a Denver payroll and employment tax lawyer, your business will receive excellent representation before Revenue Officers or the tax court. You get a tax attorney experienced in IRS payroll tax matters.
What are Employment Taxes?
Employment taxes are the amount you must withhold from your employees for their income tax and Social Security/Medicare tax (trust fund taxes) plus the amount of Social Security/Medicare tax you pay for each employee. Federal unemployment taxes are also considered employment taxes.
The tax is called a trust fund tax because you, as the employer, act as a fiduciary to hold the funds until they are deposited with the government. If you willfully fail to deposit the tax with the government, the individuals responsible for paying the trust fund taxes are personally liable.
What Happens if You Do Not Pay Employment Taxes?
- Assess a failure to deposit penalty of up to 15% of the amount due. This is against the business.
- Apply a 100% penalty against you. This is called a Trust Fund Recovery Penalty assessment against the individuals responsible for failing to pay the trust fund taxes.
- You could be found criminally liable
Some Examples of Criminal Liability in Employment Tax Cases
Here are a few anecdotal stories of some of the consequences of letting an employment tax problem get too far out of hand:
- A construction contractor received a 15-month prison sentence and three years of supervised release. He failed to pay his corporate payroll tax for a period of two years. He owed over a quarter of a million dollars in back withholding taxes to the IRS by the time of his sentencing.
- A contractor who did renovations on a federal building got in some hot water. He received a prison sentence in connection with several schemes to defraud the government, including failing to pay over $10,000 in federal withholdings.
- A defense contractor received an 18-month sentence and three years of supervised release after failing to collect and pay $2.2 million in payroll taxes.
- The owner of a temporary employment service was sentenced to a three-year prison term and one year of supervised release. She also as was ordered to pay restitution for diverting more than $2 million in payroll taxes.
- A restaurant owner was sentenced to 12 months and one day in prison for failing to collect, account, and pay employment taxes for two different corporations. She withheld taxes from an employee’s pay, but instead of reporting or paying the taxes to the IRS, she kept the money.
- The owner of a trucking company was sentenced to over a year in prison for failing to deposit employment taxes. He deducted more than $50,000 in FICA (payroll) taxes, but did not pay them to the IRS. Likewise, he improperly classified employee wages.
Defenses to IRS Enforcement Actions
There are various defenses that can be asserted if the IRS attempts to find you personally liable for employment taxes
- Establish that you did not have the status, duty, or authority to direct the the collection or payment of the employment taxes to the IRS. Just because you may be owner, secretary, or accountant, does not mean that you are automatically liable. Complete delegation can be a defense.
- If you are ordered by a superior not to make payment, that is often sufficient to avoid liability under the Internal Revenue Code.
- Timing – if you were not responsible (even if you were an employee) at the time that the tax was withheld, then you are not liable for the tax
- You did not willfully fail to pay the tax. “Willfully, as used here means that you voluntary, conscious, and intentional—as opposed to accidental-decision not to remit funds properly withheld to the government. Evil intent is not required. Thus, if you can prove you were negligent, or that it was an accidental failure, you can avoid liability.”
- The business was insolvent when you took control over it.
What are your responsibilities?
Businesses with W2 employees need to file either form 940 or 941. Which form depends on whether the IRS requires your business to file an annual or quarterly payroll tax return. Deposits into appropriate trust accounts must happen quickly regardless of filing requirements. In some circumstances, deposits are expected as soon as 24 hours after wage and salary disbursements.
What else happens if you fail to follow IRS rules about handling payroll taxes?
You can be made personally liable for any 940 or 941 tax problems. So can other officers of your company. Each of you could share full responsibility.
The Trust Fund Recovery Penalty
The IRS considers any person who can sign a company check to be a ‘responsible person’. This puts in jeopardy the homes, cars, investments and other assets of company officers. This is known as the ‘100 Percent Penalty’ or in technical terms it’s called the Trust Fund Recovery Penalty (TFRP). If a ‘responsible person’ has willfully failed to pay payroll taxes that person can be made ‘jointly and severally’ liable for the tax debt. You alone or each company officer becomes liable for 100% of the tax owed.
This trust fund liability is on the FICA tax that must be deposited with the IRS. It is not on the business’s share of employment taxes. This means that not only is your business liable for the tax, but you personally may also be liable.
If you find yourself at the point where you’ve received a notice of a TFRP you have only 10 days to dispute this assessment. Contact us immediately if you’ve found yourself in this position. You will need to provide evidence to support your case.
Your Right to Be Represented
The sooner you deal with your payroll trust fund tax problem the more likely it is we will be able to save you time, money and severe legal consequences. After several demand letters, the IRS may send you a summons. This forces you to go before the IRS and show them financial records.
Contact our team of experienced tax attorneys if you have a payroll tax problem. Your consultation is completely confidential. Don’t put off contacting us as your problem can only get worse as demand letters pile up. The IRS has only so much patience.
If you contact us early it is likely we can negotiate with the IRS and reduce your liability while possibly protecting you from criminal prosecution. Payroll tax problems hit many businesses and these problems are our specialty. Reach out, we are here to help.
Our tax lawyers offer a free 30 minute consultation. We have solutions to your employment tax problems.