If you have read Payroll Taxes – What They Are and Who Pays Them and The Trust Fund Recovery Penalty and What It Means If Your Business Is Delinquent On Payroll Taxes on this website, then you realize that the IRS classifies delinquent payroll tax payments by employers as “employment tax evasion schemes.” Employment tax evasion schemes are a high priority for IRS investigators. Payroll taxes, of course, are taxes that employers are responsible for processing from their employees’ wages and then paying to the IRS. Some of these taxes, like income tax, are really paid by the employees, but it is up to the employers to remit them to the IRS and to state income tax authorities. Others, like Federal Social Security and Medicare taxes, are split between employers and employees. Federal unemployment tax is paid by employers. All these taxes, and certain state taxes, are called “payroll taxes,” because employers are responsible for calculating them and paying them to the appropriate tax authorities when they process employee payrolls. Of course, employers need to be aware that even individuals who might not be considered “employees” for some legal purposes (for example, seasonal and temporary employees and independent contractors) may still be considered employees for tax purposes. If they are, then the employers are legally obliged to process their payroll taxes.
There are a few important things you must understand about IRS procedures when you have fallen behind in payroll taxes. First, although your business may be a “small business,” the IRS considers payroll tax evasion a very large problem, In the last decade or so, the IRS has even begun pursuing criminal charges in these cases somewhat routinely. Second, IRS payroll tax investigations are extremely thorough. IRS field agents, called Revenue Officers (ROs) will interview anyone in the business who they believe has information about payroll processing and financial decision-making. That means the RO assigned to your case will interview the owner of the business as well as every single person who might be responsible for the business decision. If your business has a board of directors, members of the board will be interviewed. Anyone involved in the payroll process, including clerical staff and people who sign paychecks, will be interviewed. If the business has an accountant, the IRS will contact him or her as well. Lastly, the RO is able to obtain copies of the business’s bank records. If the RO believes the business owner might be personally pocketing the money that should have been used for payroll taxes, that RO can obtain the owner’s personal bank records as well.
Once the RO has created as comprehensive a list as possible of all the individuals who might be responsible for the unpaid payroll taxes, the IRS will propose an assessment against each individual, up to the full amount of payroll taxes owed. At this point, the Collections Division of the IRS takes the view that each party is “jointly-and-severally liable” for the entire amount. That means that the IRS is not obliged to consider a “fair” way to divide the amount among all the people involved. Instead, the IRS will simply collect from whoever is easiest to collect from. It is hardly surprising that in this kind of legal environment, ROs find associates and employees of the business very eager to disclose exactly what went on behind closed doors.
In addition, the IRS has the power to padlock the business,
TFRP was known as the “One Hundred Percent Penalty.” This was so named because one-hundred percent of the withheld income tax and Social Security tax could be assessed against a responsible officer, employee, etc. of the corporation.
Section 6672 of the Internal Revenue Code says in part:
(a) GENERAL RULE – Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such 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.
So, the upshot is that the IRS usually considers shutting down your business and charging everyone involved with payroll processing and financial decision-making with
The tax does not get paid to the IRS. At the same time, the employee is credited with having paid the tax. If the amount credited exceeds the amount of tax owed, the employee gets a refund
Therefore – if you want to keep your business open, you need a professional third party speaking on your behalf, basically convincing the Revenue Officer that it is in the best interest of the government for your business to stay alive than be killed…and that they are more likely to get the money if they work with you. It’s a tough sell – so if you find yourself in this situation, it is critical you call and allow me to speak on your behalf to the IRS, or you may say something they will hold against you.
It’s not difficult to get into payroll tax trouble. Few business owners intentionally attempt to defraud the government out of payroll taxes, most problems stem from simply having “too much month left at the end of the money”. Then, the decision is made to put off paying the payroll tax into the IRS, essentially making a short term loan from the IRS. Here’s why this is possibly the worst loan ever, outside of the ton of reasons I’ve already outlined. The penalties! You could be hit with three major penalties (failure to file, failure to deposit, and the failure to pay), which can add up to a fortune in just the first 16 days after you have filed the Payroll Tax Return past the due date.
Every time an employer cuts checks to its employees without withholding taxes and remitting them to the United States Treasury (or pays the employees in cash instead of cutting checks), the employer gets further behind in its payroll taxes. If a business pays its employees every two weeks, then that business has 26 opportunities to fall further behind each and every year. As a general rule, employers are already significantly behind in their payroll taxes when the IRS assigns a Revenue Officer (RO) to investigate. ROs know that, almost without exception, the payroll delinquency will only continue to grow if the business continues to operate. “Padlocking” your business stops the problem in its tracks. Since the Trust Fund Penalty law allows the IRS to pursue anyone who is responsible for payroll withholdings, it is usually easiest for the IRS assess the full amount of the payroll delinquency against each and every individual involved in the process, including the business owner, responsible staff, and members of the business’s board of directors if it has one.
RESPONSIBLE PERSON TEST
Both the IRS and the courts broadly define a “responsible person.” The key element in determining responsible person status is whether a “person has the statutorily imposed duty to make the tax payments” (O’Connor, 956 F.2d 48 (4th Cir. 1992)).
Several factors indicate responsibility, including whether the person (1) has power to compel or prohibit the allocation of funds (Godfrey, 748 F.2d 1568 (Fed. Cir. 1984)); (2) has the authority to sign checks; (3) has the authority to make decisions as to disbursement of funds and payment of creditors; (4) is an officer or director of the corporation; (5) has control over the company’s payroll; (6) prepares and signs payroll tax returns; (7) actively participates in day-to-day management; or (8) hires and fires employees (Barnett, 988 F.2d 1449 (5th Cir. 1993)). Although the above list is not exhaustive, the status, duty, and authority of an employee principally determine whether the person is responsible under Sec. 6672 for paying over withholding taxes to the United States (Mazo, 591 F.2d 1151 (5th Cir. 1979)).
However, in IRS Policy Statement 5-14 (Internal Revenue Manual §188.8.131.52.3), the IRS stated that individuals who are nonowner employees performing ministerial acts without exercising independent judgment will not be deemed responsible.
– See more at: http://www.journalofaccountancy.com/issues/2014/jun/20149645.html#sthash.lmIggWT6.dpuf
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. However, the IRS reserves criminal charges for the most egregious cases, usually where the responsible person owned the business and diverted the money for his or her own personal use, rather than situations where an owner or other responsible person in a business that was facing hard times used the money to pay other creditors in a misguided attempt to keep the business afloat. As the cases discussed below show, in a successful criminal trust fund prosecution, the responsible person is usually sentenced to prison time and required to pay restitution. – See more at: http://www.journalofaccountancy.com/issues/2014/jun/20149645.html#sthash.lmIggWT6.dpuf
“Pyramiding” of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued and then start a new business under a different name and begin a new scheme.
Employee leasing is another legal business practice, which is sometimes subject to abuse. Employee leasing is the practice of contracting with outside businesses to handle all administrative, personnel, and payroll concerns for employees. In some instances, employee-leasing companies fail to pay over to the IRS any portion of the collected employment taxes. These taxes are often spent by the owners on business or personal expenses. Often the company dissolves, leaving millions in employment taxes unpaid.
Paying Employees in Cash
Paying employees, whole or partially, in cash is a common method of evading income and employment taxes resulting in lost tax revenue to the government and the loss or reduction of future social security or Medicare benefits for the employee.
Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns
Preparing false payroll tax returns understating the amount of wages on which taxes are owed, or failing to file employment tax returns are methods commonly used to evade employment taxes