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\u2019t afford us the luxury of a grace period. The same goes for unpaid payroll taxes, as well.<\/p>\n
When it comes to business taxpayers, the IRS is especially vigilant. That\u2019s because businesses must send the IRS the taxes they withhold from their employees. If they use the withheld monies for something else instead, they\u2019re taking money that\u2019s not theirs.<\/p>\n
But we\u2019re getting ahead of ourselves. Let\u2019s start at the beginning.<\/p>\n
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:<\/p>\n
\u2022 Federal Income Tax<\/strong><\/em> \u2013 Employers use each employee\u2019s W-4 to determine how much to withhold.<\/p>\n \u2022 Social Security and Medicare or FICA Taxes<\/strong><\/em> \u2013 The employer and employee contribute to these funds for the employee. Refer to the employee\u2019s W-4 and IRS Publication 15<\/a> to determine how much of the employee\u2019s wages to withhold. The employer contributes a matching amount to what they withhold from the employee.<\/p>\n Note<\/em>: Because these taxes resulted from the Federal Insurance Contribution Act (FICA), many people call them \u201cFICA taxes.\u201d<\/p>\n \u2022 Additional Medicare Tax<\/strong><\/em> \u2013 Additional Medicare Tax in the amount of 0.9 percent was added to Medicare taxes in 2013. The tax code doesn\u2019t require employers to match this additional tax. Although, they do need to withhold it from the employee\u2019s wages. The employer should then deposit it with the other employment taxes.<\/p>\n The employer only needs to withhold the additional tax on \u201cwages and compensation that exceeds a threshold amount based on the employee\u2019s filing status,\u201d says the IRS<\/a>. Go here<\/a> to learn more about the additional Medicare tax.<\/p>\n \u2022 Federal Unemployment (FUTA) Tax<\/strong><\/em> -This tax is the employer\u2019s sole responsibility. Do not withhold any of it from your employee\u2019s paychecks.<\/p>\n Employment taxes and payroll taxes are basically the same thing. Although, payroll taxes more specifically refer to FICA taxes. \u201cPayroll taxes are specific taxes used for specific programs,\u201d says Investopedia<\/a>. \u201cThey are distinct from income taxes, which are put into the government\u2019s general fund.\u201d<\/p>\n The IRS tends to take them more seriously than standard business taxes. That\u2019s 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<\/a>.<\/p>\n 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.<\/p>\n The best way to avoid the TFRP is to resist the temptation to use the cash flow for other purposes.<\/em> 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.<\/p>\n That is, just until the big sale goes through or after the seasonal rush. The trouble is that these things don\u2019t always go as you might expect them to.<\/p>\n 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.<\/p>\n The IRS casts a wide net of responsibility for unpaid employment taxes. In fact, any person within or outside the company who \u201chas the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes\u201d is responsible, says the IRS<\/a>. \u2022 Officer or employee of a corporation The trust fund recovery penalty isn\u2019t a monetary fine like most IRS penalties. Instead, it\u2019s a collection method that \u201cpermits the IRS to impose liability on a \u2018responsible person\u2019 who \u2018willfully\u2019 failed to remit the employment taxes that were held in trust for the government,\u201d says The CPA Journal<\/a>.<\/p>\n But first, the IRS tries to collect the taxes from the business. Forbes<\/a> explains, \u201cThey assess monetary penalties against the business. They issue tax lien notices against the business and record them in the local Register of Deeds\u2019 office. They may attempt to levy (seize) the business\u2019s bank accounts.\u201d<\/p>\n 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\u2019s taxes. That\u2019s the Trust Fund Recovery Penalty.<\/p>\n In addition to determining who\u2019s responsible, the IRS must find that the individual willfully neglected to pay the employment taxes. The IRS says the responsible person:<\/p>\n \u2022 Must have been, or should have been aware of the outstanding taxes and They also note, \u201cUsing available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.\u201d<\/p>\n The IRS investigates standard business practices to determine who\u2019s responsible for the business\u2019s taxes. According to The CPA Journal<\/a>, \u201cThe revenue officer typically requests bank signature cards, cancelled checks, and other business records to identify potential responsible persons.\u201d<\/p>\n \u201cIf the company does not provide these documents voluntarily, administrative summons will be used to demand the records from the business or from third parties.\u201d These documents ultimately reveal who worked with the money flowing in and out of the company.<\/p>\n 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.<\/p>\n \u201cGenerally, a taxpayer should not<\/strong><\/em> submit to an interview by the IRS without representation by qualified counsel,\u201d according to Forbes. That doesn\u2019t 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.<\/p>\n 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.<\/p>\n Another reason it\u2019s 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, \u201coften including persons with marginal liability exposure.\u201d<\/p>\n 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\u2019s taxes. But that\u2019s 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.<\/p>\n 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.<\/p>\n 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\u2019t achieve the results that you and your representation think are fair, you can appeal the decision.<\/p>\n 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. \u201cThe 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,\u201d says the IRS.<\/p>\n If you\u2019ve 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\u2019t know what makes sense in your case, they can help.<\/p>\n We\u2019ve 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.<\/p>\n [1] \u201c5.7.6 Trust Fund Penalty Assessment Action: Internal Revenue Service.\u201d 5.7.6 Trust Fund Penalty Assessment Action | Internal Revenue Service, 10 Sept. 2017, www.irs.gov\/irm\/part5\/irm_05-007-006<\/a>.<\/p>\n [2] Dunn, Stephen J. \u201cThe Federal Trust Fund Recovery Penalty.\u201d Forbes, Forbes Magazine, 13 Apr. 2013, www.forbes.com\/sites\/stephendunn\/2012\/12\/29\/the-federal-trust-fund-recovery-penalty\/#3e78f2b1178c<\/a>.<\/p>\n [3] \u201cEmployment Taxes and the Trust Fund Recovery Penalty TFRP: Internal Revenue Service.\u201d 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<\/a>.<\/p>\n [4] Flynn, Kevin M. \u201cThe Trust Fund Recovery Penalty.\u201d The CPA Journal, 27 Nov. 2017, www.cpajournal.com\/2017\/11\/28\/trust-fund-recovery-penalty\/<\/a>.<\/p>\n [5] Kagan, Julia. \u201cWhat Is a Payroll Tax?\u201d Investopedia, Investopedia, 28 Aug. 2019, www.investopedia.com\/terms\/p\/payrolltax.asp<\/a>.<\/p>\n [6] \u201cPublication 15 (2019), (Circular E), Employer’s Tax Guide.\u201d Internal Revenue Service, 26 Dec. 2018, www.irs.gov\/publications\/p15#en_US_2012_publink1000202428<\/a>.<\/p>\n [7] \u201cQuestions and Answers for the Additional Medicare Tax.\u201d Internal Revenue Service, 2 July 2019, www.irs.gov\/businesses\/small-businesses-self-employed\/questions-and-answers-for-the-additional-medicare-tax<\/a>.<\/p>\nWhat are Unpaid Payroll Taxes?<\/h4>\n
Who\u2019s Responsible for Unpaid Payroll Taxes<\/h4>\n
\nThey list the following examples of people who they may deem responsible for a company\u2019s unpaid payroll taxes:<\/p>\n
\n\u2022 Member or employee of a partnership
\n\u2022 Corporate director or shareholder
\n\u2022 A member of the board of trustees (if it\u2019s a nonprofit organization)
\n\u2022 Someone with authority and control over the company\u2019s money
\n\u2022 Applicable employees of a payroll service provider
\n\u2022 Applicable employees of an employment agency<\/p>\nTrust Fund Recovery Penalty<\/h4>\n
\n\u2022 Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).<\/p>\nTFRP Investigation<\/h4>\n
Should I hire professional representation for help with unpaid payroll taxes?<\/h4>\n
What if the IRS imposes a TFRP on me?<\/h4>\n
Sources<\/h4>\n