Unpaid Payroll Taxes?-Please Read This

September 11th, 2016 at 3:31 PM

If your business withholds taxes from its employees and does not pay them, your business and possibly yourself are exposed to substantial liabilities.

The IRS trust fund recovery penalty can make you personally liable for the unpaid trust fund taxes for your business. Trust fund taxes are those that an employer withholds from an employee’s check and remits to the IRS, on the employee’s behalf. Non-trust fund taxes are those the employer is liable for the employer’s share of Social Security and Medicare taxes. The non-payment of trust fund taxes is tantamount to theft–the business took the money from the employees, but did not remit the funds to the IRS–big mistake!! Now the IRS can pierce the corporate veil and make individuals personally liable for the total unpaid trust fund taxes + penalties–ouch. To do so, the IRS can assert their power against anyone who meets both the responsibility and willful tests to apply to owners, employees, bookkeepers, and accountants. To make matters even worse, the IRS has a 10 year statue of limitations to pursue its remedies.

4 Ways to Defeat the Trust Fund Penalty

1. Not a Responsible Person–According to the IRS, responsibility is a matter of status, duty, and authority–based upon the facts and circumstances of the situation. Here are the factors the IRS considers to determine responsibility:

• is the person an officer, director, or shareholder of the corporation
• did the person have authority to hire and fire employees
• did the person exercise authority to determine which creditors to pay
• did the person sign and file the employment tax returns
• did the person control payroll and other disbursements
• did the person control the corporation’s voting stock
• did the person make federal tax deposits

It must be noted that no one factor is determinative–I advise my clients on how to apply these factors.

2. Not Willful–Willful means intentional, deliberate, voluntary, reckless, or knowing. To show willfulness, the IRS has to show the individual was aware of the unpaid taxes and either chose not to pay them or recklessly disregarded an obvious risk that they would be unpaid–this generally applies who one knew of the unpaid taxes but chose instead to pay other creditors.

3. Penalty is not Collectible–IRS policy states they will generally not assess the trust fund recovery penalty if there is no current or future collection potential, or if the individual cannot be located. The IRS will assess the individual’s current financial condition, income history, and future income potential.

4.Too Late–The statue of limitations on assessment with respect to any tax period within a calendar year is 3 years from the later of the succeeding April 15th or the filing date of the return, whichever is later. The trust fund recovery penalty must be assessed with in this time frame.

The most common reason that causes a business to not its payroll taxes is it’s in dire financial trouble. Keep in mind, if you are an owner, that the IRS can multiply the financial stress by making you personally liable for the trust fund portion of those payroll taxes.