Payroll Tax Problems

    Payroll Taxes

    Whether you think that the “payroll tax” is a good thing or not…(my feelings, by the way, are nicely summed up, to the right), it really exists.

    AND if it is not paid, it makes the Government especially “crazy” for lack of a better word.

    Businesses that don’t withhold and pay the tax, or worse, withhold and don’t pay, are prime targets of the IRS.  They can be shut down, and their assets seized.  THEN the tax debt that is owed can be assessed against the “responsible” individuals in addition to the business.

    My goal is to save the business if it is worth saving, and secondly to protect those who should not have these payroll taxes assessed against them personally.

    The Trust Fund Recovery Penalty

    The unpaid tax withheld from the employee wage is held theoretically in “trust” by the employer.  Thus the name of the penalty.  Commonly as touched on, the business owners use the funds to stay afloat with the good intention of paying those funds later when the business is doing better.

    The IRS has the authority to cast a net and to seek to collect these taxes from anyone who had anything to do with the management or finances of the company.  The IRS can “pierce” the corporate veil and assess directly against these “responsible” parties an amount equal to the amount not paid.

    This “penalty” exists under section 6672 of the IRC.

    IRC 6672(a) states in part:

    “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 for a penalty equal to the total amount of the tax evaded, or not collected or not accounted for and paid”.

    Under this section the IRS must determine:

    1.  Who was Responsible? – Extensively litigated, this issue is factually driven and courts have used different language to define it.  Typically the focus is on the person’s status, duty and authority within the Corporation.  As the issue of responsible person is so dependent on the facts and circumstances of each case, an experienced tax lawyer is needed to make the factual argument and provide support.

    2.  Whether willful?  Not directly defined in section 6672, willful has been defined as a voluntary conscious and intentional decision to prefer other creditors over the government OR a reckless disregard of a known or obvious risk that the trust funds may no be remitted to the government such as by failing to investigate or correct.

    These debts are difficult.  The amounts are usually large and are not discharged in bankruptcy.  The IRS will attempt to assess against anyone who signed checks or had the authority to sign checks.  Often the assessment is made against clerks, officers in name only, and others who may have had nothing to do with the debt.

    The GOOD NEWS.  These debts can be dealt with via an offer in compromise, installment agreement, non collectible status and possibly within a chapter 13 or chapter 11 bankruptcy.

    Also, the penalty can be challenged by paying the amount of the withheld taxes for one employee for a single withholding tax quarter and filing a refund claim.  The denial of the refund claim by the IRS gives access to court if necessary.

    Contact Me

    If you are being questioned by the IRS about trust fund taxes or have had a trust fund recovery penalty assessed, you need experienced counsel.  Fill out my contact sheet, I will review and contact you over the phone for free.

    Visit my TaxBlog  to read more about this penalty.