Your Complete Guide to Unpaid Payroll Taxes
As individual taxpayers, we know the IRS is serious about collecting the taxes we owe them. They impose expensive penalties, and interest starts to accrue the day after taxes are due. They certainly don’t afford us the luxury of a grace period. The same goes for unpaid payroll taxes, as well.
When it comes to business taxpayers, the IRS is especially vigilant. That’s because businesses must send the IRS the taxes they withhold from their employees. If they use the withheld monies for something else instead, they’re taking money that’s not theirs.
But we’re getting ahead of ourselves. Let’s start at the beginning.
What are Employment Taxes?
The tax code requires employers to withhold some taxes before paying their employees their earned wages. These are called employment taxes and they generally include:
• Federal Income Tax – Employers use each employee’s W-4 to determine how much to withhold.
• Social Security and Medicare or FICA Taxes – The employer and employee contribute to these funds for the employee. Refer to the employee’s W-4 and IRS Publication 15 to determine how much of the employee’s wages to withhold. The employer contributes a matching amount to what they withhold from the employee.
Note: Because these taxes resulted from the Federal Insurance Contribution Act (FICA), many people call them “FICA taxes.”
• Additional Medicare Tax – Additional Medicare Tax in the amount of 0.9 percent was added to Medicare taxes in 2013. The tax code doesn’t require employers to match this additional tax. Although, they do need to withhold it from the employee’s wages. The employer should then deposit it with the other employment taxes.
The employer only needs to withhold the additional tax on “wages and compensation that exceeds a threshold amount based on the employee’s filing status,” says the IRS. Go here to learn more about the additional Medicare tax.
• Federal Unemployment (FUTA) Tax -This tax is the employer’s sole responsibility. Do not withhold any of it from your employee’s paychecks.
What are Unpaid Payroll Taxes?
Employment taxes and payroll taxes are basically the same thing. Although, payroll taxes more specifically refer to FICA taxes. “Payroll taxes are specific taxes used for specific programs,” says Investopedia. “They are distinct from income taxes, which are put into the government’s general fund.”
The IRS tends to take them more seriously than standard business taxes. That’s because the employer takes the money from their employees. The employer should then put it in a trust fund for safekeeping. Finally, the company accountant should include it when he or she makes the quarterly deposit.
If there are unpaid payroll taxes on the quarterly due date, the IRS may consider the Trust Fund Recovery Penalty (TFRP). We discuss the TFRP in more detail below.
The best way to avoid the TFRP is to resist the temptation to use the cash flow for other purposes. Keep it in the trust fund and withdraw it only to deposit it with your quarterly taxes. Many struggling companies have made the mistake of using the cash in the trust fund to make ends meet.
That is, just until the big sale goes through or after the seasonal rush. The trouble is that these things don’t always go as you might expect them to.
Most companies find that having unpaid payroll taxes after the due date results in heavy consequences. In fact, many companies have struggled to overcome the penalties of overdue payroll taxes. The IRS has the legal capacity to shut the business down, and they do occasionally use it.
Who’s Responsible for Unpaid Payroll Taxes
The IRS casts a wide net of responsibility for unpaid employment taxes. In fact, any person within or outside the company who “has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes” is responsible, says the IRS.
They list the following examples of people who they may deem responsible for a company’s unpaid payroll taxes:
• Officer or employee of a corporation
• Member or employee of a partnership
• Corporate director or shareholder
• A member of the board of trustees (if it’s a nonprofit organization)
• Someone with authority and control over the company’s money
• Applicable employees of a payroll service provider
• Applicable employees of an employment agency
Trust Fund Recovery Penalty
The trust fund recovery penalty isn’t a monetary fine like most IRS penalties. Instead, it’s a collection method that “permits the IRS to impose liability on a ‘responsible person’ who ‘willfully’ failed to remit the employment taxes that were held in trust for the government,” says The CPA Journal.
But first, the IRS tries to collect the taxes from the business. Forbes explains, “They assess monetary penalties against the business. 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.”
If these methods are unsuccessful, they then look to the responsible people of the business. Eventually, the individual(s) responsible for the company money will be personally liable for the business’s taxes. That’s the Trust Fund Recovery Penalty.
In addition to determining who’s responsible, the IRS must find that the individual willfully neglected to pay the employment taxes. The IRS says the responsible person:
• Must have been, or should have been aware of the outstanding taxes and
• Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).
They also note, “Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.”
The IRS investigates standard business practices to determine who’s responsible for the business’s taxes. According to The CPA Journal, “The revenue officer typically requests bank signature cards, cancelled checks, and other business records to identify potential responsible persons.”
“If the company does not provide these documents voluntarily, administrative summons will be used to demand the records from the business or from third parties.” These documents ultimately reveal who worked with the money flowing in and out of the company.
The revenue officer then works to secure an interview with the person(s) that may be responsible for the unpaid payroll taxes. The CPA Journal points out that if an individual refuses to submit to an interview, then the officer will probably issue a subpoena to compel him or her to do so.
Should I hire professional representation for help with unpaid payroll taxes?
“Generally, a taxpayer should not submit to an interview by the IRS without representation by qualified counsel,” according to Forbes. That doesn’t necessarily mean you should hire an attorney. A CPA that specializes in tax or an Enrolled Agent is often more familiar with IRS procedures, the tax code, and the TFRP. Those tax professionals have unlimited representation rights with the IRS.
Professional and reputable representation is important because revenue officers scrutinize the information and statements you provide. The IRS uses the information that they obtained during the interview. You may inadvertently misunderstand the question or answer incorrectly. Regardless, the IRS imposes the TFRP based partly on the information they receive in the interview.
Another reason it’s important to have representation is because the questions are designed to elicit certain responses. When the revenue officer is in doubt, he or she is likely to error on the side of imposing the penalty. Forbes adds, “often including persons with marginal liability exposure.”
What if the IRS imposes a TFRP on me?
If the IRS imposes a trust fund recovery penalty on an individual, then that person is liable for his or her share of the business’s taxes. But that’s not all. He or she must also pay their share of the monetary penalty that comes with it. The monetary penalty is 100 percent of the unpaid payroll taxes.
For example, if the IRS finds that four people are responsible for unpaid payroll taxes of $10,000, then $20,000 is due. Each of the four people are liable for $5,000. The IRS then commences with individual collection action.
On the other hand, if you disagree with their decision, you have options. For instance, you can request mediation by a third party to negotiate the TFRP. If those efforts don’t achieve the results that you and your representation think are fair, you can appeal the decision.
In fact, you can appeal the decision to investigate your responsibility as soon as you receive the Proposed Assessment of Trust Fund Recovery Penalty notice from the IRS. “The responsible party has 60 days (75 if the letter was addressed outside of the United States) from the date of the mailing of the notice or the date of personal delivery to respond,” says the IRS.
If you’ve received a Proposed Assessment of Trust Fund Recovery Penalty notice from the IRS, contact a tax relief professional. Whether you know how to proceed, or you don’t know what makes sense in your case, they can help.
We’ve constructed a helpful, user-friendly directory to help you find one near you. This tool is available 24 hours a day, seven days a week, free of charge. Our goal is to empower our visitors with access to a variety of tax relief professionals for their needs.
 “5.7.6 Trust Fund Penalty Assessment Action: Internal Revenue Service.” 5.7.6 Trust Fund Penalty Assessment Action | Internal Revenue Service, 10 Sept. 2017, www.irs.gov/irm/part5/irm_05-007-006.
 Dunn, Stephen J. “The Federal Trust Fund Recovery Penalty.” Forbes, Forbes Magazine, 13 Apr. 2013, www.forbes.com/sites/stephendunn/2012/12/29/the-federal-trust-fund-recovery-penalty/#3e78f2b1178c.
 “Employment Taxes and the Trust Fund Recovery Penalty TFRP: Internal Revenue Service.” Employment Taxes and the Trust Fund Recovery Penalty TFRP | Internal Revenue Service, 26 June 2019, www.irs.gov/businesses/small-businesses-self-employed/employment-taxes-and-the-trust-fund-recovery-penalty-tfrp.
 Flynn, Kevin M. “The Trust Fund Recovery Penalty.” The CPA Journal, 27 Nov. 2017, www.cpajournal.com/2017/11/28/trust-fund-recovery-penalty/.
 Kagan, Julia. “What Is a Payroll Tax?” Investopedia, Investopedia, 28 Aug. 2019, www.investopedia.com/terms/p/payrolltax.asp.
 “Publication 15 (2019), (Circular E), Employer’s Tax Guide.” Internal Revenue Service, 26 Dec. 2018, www.irs.gov/publications/p15#en_US_2012_publink1000202428.
 “Questions and Answers for the Additional Medicare Tax.” Internal Revenue Service, 2 July 2019, www.irs.gov/businesses/small-businesses-self-employed/questions-and-answers-for-the-additional-medicare-tax.
 “Understanding Employment Taxes.” Internal Revenue Service, 1 May 2019, www.irs.gov/businesses/small-businesses-self-employed/understanding-employment-taxes.