Payroll Tax
The tax that an employer withholds from an employee’s paycheck is considered a “trust fund” tax because the employer has the responsibility of collecting this money, holding it, and passing it on to the IRS. The employer is “entrusted” with its care.
The failure to forward the employee’s tax money is serious business. The IRS considers it to be similar to theft, and as a result, it is given a higher priority in terms of it’s collection than unpaid income tax receives.
It is not the employer’s money, and therefore the employer may face serious financial penalties and collection action by the IRS, or worse.
Even a single missed payroll tax payment may affect the payments for the rest of the year. When an employer misses a payroll tax payment, the IRS will apply the next payment to the missed payment rather than to the tax period the employer intended it to cover. Because the current payment was applied to the delinquent pay period, the current period will become delinquent. This means that a penalty will be imposed every single tax period for the rest of the year.
Misapplication of employment tax payments can have a serious impact on a business, and it may be more difficult to work out an arrangement with the IRS as a result.
Not only will the IRS aggressively seek to recover the owed tax from the employer but it will also attempt to pierce the employer’s “corporate veil” and assess the tax debt against those it considers to be “responsible parties.” This assessment is called a “trust fund recovery penalty.”
“Responsible parties” often include the obvious company president and other management personnel. Surprisingly, it also often includes various employees who have no ownership interest in the company. The IRS will make this assessment against employees even if it appears that the employee would have a good defense. The most common employees targeted are those involved in the accounting and bookkeeping work of the business and especially those with check signing authority as well as management spouses and other “important” employees.
Unfortunately, this penalty cannot be discharged in bankruptcy and it is typically quite large.
If the taxpayer is aware that they are a target of the IRS, or have been interviewed, they should seek legal counsel. If the penalty has long been assessed and the taxpayer has lost his or her opportunity to challenge the assessment as a result, other options may exist, like the offer in compromise or the payment of the penalty for one employee followed by a claim for a refund or other federal court litigation.
If you have a debt related to an old penalty, are being threatened with a new trust fund recovery penalty, or have any employment tax problem facing your small business, call to discuss your options.
