The IRS is vigilant about collecting taxes in full and on time. They waste no time imposing penalties and interest on individuals. That’s not to say businesses are less vulnerable. Instead, one of the risks of unpaid payroll taxes is that the IRS specifically targets these businesses for collection. That’s because unpaid payroll taxes account for almost $60 billion in lost revenue.
In fact, the U.S. Justice Department sees unpaid payroll taxes as a substantial problem. It shares a snapshot of how they impact overall revenue for the IRS.
“Amounts withheld from employee wages represent nearly 70% of all revenue collected by the IRS and, as of June 30, 2016, more than $59.4 billion of tax reported on Employer’s Quarterly Federal Tax Returns (Forms 941) remained unpaid.”
Business aren’t the only entities exposed to the risks of unpaid payroll taxes. The IRS can hold individuals who are a part of the business liable for them, as well.
Risks of Unpaid Payroll Taxes for Individuals
The IRS tries to collect unpaid payroll taxes from the business first. “They assess monetary penalties against the business,” says Forbes. In addition, they explain, “They issue tax lien notices against the business and record them in the local Register of Deeds’ office. They may attempt to levy (seize) the business’s bank accounts.”
However, their efforts aren’t always successful. If their collection efforts don’t work, the IRS turns to the individuals in charge of handling the business’s money. But first they have to decide who is liable for the monies by law. So, they initiate an investigation to learn more about the business’s common financial practices.
Determining Who is Liable for Unpaid Payroll Taxes
Business owners aren’t the only people with exposure to the penalties for unpaid payroll taxes. Anyone with the duties to handle money coming into or going out of the business are responsible. In fact, the IRS has the legal right to even hold employees of third-party payroll companies liable.
During the investigation, the IRS reviews bank documents and business records. This is chiefly how they determine who should be targets for the trust fund recovery penalty (TFRP).
Trust Fund Recovery Penalty
The trust fund recovery penalty essentially assigns the unpaid tax liability to an individual. The individual becomes responsible for paying it, leaving him or her vulnerable to the consequences of unpaid employment taxes. Then the IRS uses wage garnishments, bank levies, tax liens, and other collection efforts to recover the unpaid taxes.
In addition, the individual imposed with a TFRP must pay applicable interest and penalties. The penalty for unpaid employment taxes is 100 percent. For example, if the business fails to pay $5,000 of employment taxes, the individual owes $10,000.
Sometimes, the IRS assigns liability to more than one person. In these cases, they equally divide the unpaid taxes, penalty, and interest among the responsible people. Then, the IRS asserts aggressive efforts to collect the unpaid taxes from each person.
That means the responsible people are exposed to the many dangers of unpaid payroll taxes. The IRS can put a lien on their home, take their car, or garnish their wages, for examples. To learn more about what you can do if the IRS imposes a TFRP on you, take a look at our guide to unpaid payroll taxes.
Avoiding the Expensive Hazards of Unpaid Payroll Taxes
Handling money for your business, or the business you work for doesn’t make you vulnerable to the dangers of unpaid payroll taxes. The IRS must not only show that you’re responsible for money, but that you also didn’t pay the taxes when you could’ve. That’s not to say that you had to have neglected them on purpose.
The IRS requires you to participate in an interview about the business’s finances. The interview consists of questions designed to elicit certain responses. It’s common for people to inadvertently implicate themselves during this interview, for that reason.
Experts recommend that you hire representation to help you avoid the consequences of unpaid payroll taxes. Certified Public Accountants that specialize in tax and Enrolled Agents have unlimited representation rights with the IRS.
These tax professionals act on your behalf throughout the TFRP investigation process. Reputable tax professionals understand IRS procedure and can skillfully navigate the procedure for the best possible results.
What to do Next
If you need help with a TFRP, then you’ve come to the right place. Use our free, user-friendly directory to locate a reputable tax professional with TFRP experience. Then gather pertinent documentation that helps to establish why you’re not responsible for the taxes.
When you discuss your case with your representation, he or she is likely to ask for these things. He or she may also recommend other documents to help further your case. Be open and honest with your tax professional. They’re on your side.