As a small business owner, the most important thing you should understand about payroll taxes (also known as “employment taxes”) is that the IRS pays a great deal of attention to them… and that when the IRS investigates the way your business handles payroll taxes, it is actually investigating you as well. When Congress created the Trust Fund Recovery Penalty (TRFP), it created a law that allows the TRFP to be assessed against any person who is responsible for collecting or paying withheld income and employment taxes but who willfully fails to pay them. Under the law, payroll taxes actually belong to the employees. When an employer withholds those taxes from an employee’s paycheck, the employer is holding those funds “in trust” to be paid to the Federal government by the employer. The penalty under the TRFP is equal to the amount of taxes evaded, not collected, not accounted for, or not paid to the IRS. The IRS also charges interest on the penalty. If this overwhelming, that is because it is meant to be. The IRS actively seeks to shut down businesses which are continuing to incur payroll tax delinquencies (“back taxes”).
For many years now, the IRS made “employment tax schemes” a high priority for audits and other types of investigations. The IRS considers delinquent payroll taxes category of employment tax scheme. If you do not withhold payroll taxes correctly or you file false payroll tax returns for your business, you are at high risk for IRS audit. The same is true if you fail to do these things entirely. This often happens when you pay employees in cash or when you classify people who work for you as independent contractors even though the IRS considers them to be employees.
If the IRS contacts you about employment taxes, you need legal representation. This is because not only is your business at risk, so are you personally. When an IRS Revenue Officer (RO’s are the IRS’s collections agents—see my article When the IRS Surprises You With a Visit on this web site) discusses payroll taxes with you, he or she is actually performing an “Interview with Individual Relative to Trust Fund Recovery Penalty.” The key word here is “individual,” because the IRS is allowed to collect unpaid payroll taxes not only from the business, but from the assets of the individuals involved in the finances of the business. Not surprisingly, business owners, shareholders and officers are prime targets. However, anyone who signed or could have signed bank checks and paid creditors can be investigated because the IRS wants to determine who made the decision not to pay employee withholding.
What should you do if the IRS wants to interview you about payroll taxes? You should do the same thing you would do if the IRS wanted to interview you about any other type of tax matter. Contact your attorney. If the IRS employee approaches you at home or at work, obtain the employee’s contact information from his IRS identification card and inform him that you plan to obtain legal representation. Then, contact your attorney.
There are a few reasons why you should involve an attorney as soon as you realize that the IRS has questions about your business’s payroll taxes. The first reason is that there are defenses to TFRP cases. An attorney can advise you about these defenses. With your attorney’s help, you might be able to prove that you did not “willfully” fail to pay employment taxes. Another reason for involving an experienced tax attorney is that even if the IRS insists that you acted “willfully,” there is usually still room for negotiation. In fact, most delinquent payroll tax cases can be resolved by persuading the IRS to agree to a payment plan or some other form of compromise. It is important to have a lawyer with experience dealing with the IRS to make sure that you are not obliged to pay them more than necessary and to protect your assets and your business’s assets from unnecessary risk.
If the IRS has contacted you about delinquent payroll taxes, or if you believe you might be at risk of a payroll tax investigation, contact me at 412-920-6565 for a free consultation to discuss your concerns. Having IRS worries as a small business owner can feel overwhelming. Call me so that we can discuss ways to get the situation under control and prevent future worries.
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To learn more about payroll taxes are and who is responsible for paying them, read my article, Payroll Taxes – What Are They and Who Pays Them?, on this web site. For purposes of this article, simply know that payroll taxes include federal, state and local income tax withholdings, federal and state unemployment tax and federal Social Security and Medicare taxes.