We have been helping business taxpayers with their IRS tax problems for a very long time. One of the worst tax violations we encounter is the failure of an employer to remit payroll taxes it has withheld from its employees’ pay. But despite its gravity, it is one of the most frequent tax problems we encounter.
Payroll tax delinquencies are treated harshly
The IRS is required by law to give employees the benefit of all taxes withheld by their employers whether or not such taxes were remitted to the government. Consequently, when an employer fails to turn over withheld taxes, the IRS loses money. The IRS doesn’t like to lose money.
Withheld taxes are held in trust for the government
The payroll taxes an employer holds back from an employee (called the "Trust Fund") never belong to the employer, but rather are held in a constructive trust for the federal government. Thus, every employer is a trustee whose sole beneficiary is the United States. As a trustee, the employer has a fiduciary duty to properly report and turn over all withheld taxes.
If you don't do it, it is considered by the feds to be theft of government funds and the IRS may refer the case to its criminal investigation division.
Installment payment plans for in-business taxpayers
Employers who are behind in their payroll tax deposits can count on immediate and aggressive collection action by the IRS. There is good reason for this: The IRS is concerned that a delinquent payroll tax employer who is still in business will continue to use the Trust Fund for its own purposes.
The IRS calls this "pyramiding" and will shut your business down if you continue to do it, or if it has a reasonable belief that you will continue to do it.
Fortunately, there is a solution. If the business can show that it has corrected the problem and is now keeping current with its payroll tax deposits, and can show that it is profitable enough to allow it to remain current and make payments on the unpaid payroll taxes (plus penalties and interest), the IRS will consider an Installment Payment Agreement.
The trust fund penalty
But there is more bad news. The IRS is empowered to assess a penalty against individuals working for the company who are deemed responsible for the failure of the business to remit payroll taxes. This penalty is called the Trust Fund Penalty because it imposes a fine that is equal to the portion of the payroll taxes that was withheld from employees' pay and held in trust for the government. For example, if you paid an employee annual gross wages of $50,000 and withheld $10,000 in federal income taxes and $3,825 (7.65% x $50,000) in FICA and Medicaid taxes, the Trust Fund penalty is $13,825.
The Trust Fund Penalty may be assessed against more than one individual, and the IRS often assesses it against people within the organization who were neither shareholders nor officers.
Advice: Seek professional advice
Before you attempt to deal with the IRS yourself, we strongly recommend that you consult with a tax attorney or CPA experienced in dealing with these matters. The early involvement of a tax professional will usually allow you to avoid criminal prosecution, remain in business and get more favorable repayment terms.
Peter Pappas is a tax attorney and Certified Public Accountant. He and his Baldwin Park firm, The Pappas Group, have been assisting both federal and state taxpayers with their tax problems for more than 25 years. For more information, call Peter at 407-648-2555, email him at firstname.lastname@example.org or visit PappasTax.com