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Unpaid payroll taxes or “trust fund taxes” can wreak havoc on your business and may even cause your business to close down. The IRS has reported that unpaid employment taxes are in the billions. Even worse, more than 64,200 tax-exempt organizations are reported to owe almost $1 billion. These are astonishing figures. Don’t let your business come to this end. Put a stop to it quickly and get help by hiring a tax attorney to assist you with your payroll tax problems.

IRS and collection of payroll taxes

As an employer, you have a responsibility to collect payroll tax documents, accurately calculate and withhold payroll taxes, deposit payroll taxes and timely file payroll tax reports (FormPay unpaid payroll taxes
941- Employer’s Quarterly Federal Tax Return). Collected payroll taxes include the employee’s share of federal withheld tax, FICA (Medicare/Social Security) and state income taxes. Deposits are generally made semi-weekly or monthly depending on the amount of payroll taxes owed.

Borrowing from payroll taxes is illegal and is considered theft in the eyes of the IRS. Unfortunately, too many businesses use collected payroll taxes (that were supposed to go to the IRS) to pay other business expenses. Due to the severity of payroll tax debt, the IRS is always looking for ways to increase enforcement actions. Be vigilant in staying tax compliant! If you cannot, the probability is high that you will face a federal tax lien, bank levy or other form of collection action due to delinquent payroll taxes.

The following are some things to consider when facing the prospect of failing to pay your payroll taxes:

IRS Revenue officers.  When a business fails to pay their employment taxes, the case is often turned over to a revenue officer, its highest level of collection officer.  When it comes to payroll tax debt, the revenue officer has enormous power.  A delinquent business is typically visited by the assigned revenue officer, who will assess and investigate your business operations in order to collect on the tax debt.  

Small business focus.  Be very aware if you are a small business because you are the target of increased IRS enforcement. The IRS claims small businesses as the main tax evaders of IRS tax debt.  Thus, the IRS tends to focus their collection efforts on small businesses.

Payroll tax penalties. It is not uncommon for the penalties and interest to end up being almost as much as the actual tax debt due.   The three penalties you can incur is (1) failure to deposit, (2) failure to file, and (3) failure to pay.  These penalties can begin to add up to exponentially and don’t forget about the interest that accrues if you don’t file your 941 on time.  For example, if you are late to deposit 1-5 days late, there is a 2% penalty of the past due amount.  If you are 6-15 days late, the penalty is 5%.  If you are 16 or more days late, the penalty is 10%.  

Federal Crime.  Yes, failing to pay trust fund taxes can lead to criminal charges.  According to IRC Sec. 7202, a willful failure to pay over or collect tax is a felony punishable by up to a $10,000 fine or five years in prison, or both. Not to fret, however, criminal charges are only for the most serious cases.  One common example is when someone diverts money for his or her own personal use.   If you are found to be willful, the IRS can hand your case over to the criminal investigation division and on up to the Department of Justice.  

Trust Fund Recovery Penalty.  Additionally, there is the added fear of the business owner or persons responsible for payroll or check signing authority to be 100% personally liable for the unpaid employment taxes.  The IRS may assess what is called a “trust fund recovery penalty” (“TFRP”) against you under IRC Section 6672 of the tax code (see also Internal Revenue Manual TFRP).  This penalty can be assessed against multiple people, an IRS tactic meant to maximize the chances of getting one of the people to pay up.  This penalty can even be assessed against people that had no knowledge that payroll taxes were not being paid.

IRS tax relief from payroll tax debt

If you respond to the IRS in time to save your business, the best options are to enter into a payment plan with the IRS or submit an offer in compromise to settle the employment taxes owed.  If you do not respond in time, you are still required to pay off your tax debt.  The worst case scenario is the IRS closes your business and seizes all your assets to pay off the debt.  Additionally, as discussed above, your personal finances are at risk. Before this happens, find a savvy tax attorney who has experience in payroll tax issues to advise you on the best course of action and who can negotiate your payment plan or offer in compromise.

Before a tax resolution may be found, tax compliance is of paramount importance.  This means you must be in compliance with all “current” payroll tax deposits.  Generally you must be in compliance six months prior to resolution.  If you are not, the IRS will view you as continually non-compliant and will not agree to any resolution.  Once you are compliant, a tax attorney can help you figure out a way to keep current while keeping your business viable.

To greatly improve your chances it is crucial to find an experienced tax attorney.  The Tax Attorneys at Delia Law have many years of IRS experience and will aggressively represent you before the IRS. Please call for a no-cost tax attorney consultation at (619) 639-3336. We look forward to helping you.

This blog post is not intended as legal advice and should be considered general information only.

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