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Payroll Taxes – Beware the Pitfalls of Avoidance (Part 2)

26Jul2017

Payroll Taxes – Beware the Pitfalls of Avoidance (Part 2)

The IRS has become aggressive in its effort to collect unpaid payroll taxes. Payroll taxes are the taxes paid on the wages and salaries of employees. They are used to finance social insurance programs, such as Social Security and Medicare. An employer is responsible for paying half of payroll taxes (7.65%) while the other half should be withheld from employees’ paychecks and deposited to the IRS at regular intervals.

If you fail to pay payroll taxes, taxing authorities will eventually come knocking. They can assess monetary penalties, issue tax lien notices, and seize bank accounts. To encourage timely payment the IRS imposes a Trust Fund Recovery Penalty (“TFRP”). The TFRP may be assessed against any person who (i) is responsible for collecting or paying withheld payroll taxes and (ii) willfully fails to collect or pay them.

i. Responsible Person Test: The TFRP can be imposed on any responsible person, regardless of the form of business entity. The IRS essentially considers anyone with bank signature authorization to be a responsible person. Therefore, a responsible person could include: officers, employees, partners, corporate directors or shareholders, accountants, volunteer directors or trustees, another corporation or a third-party payer. It’s important to realize that use of an outside payroll service will not shield a responsible employer or its responsible employees from liability for failing to meet its payroll tax obligations. In the event of an investigation, each potential responsible person needs separate, qualified counsel because the IRS will likely attempt to interview all potentially responsible persons.

ii. Willful Failure Test: The IRS does not require a bad motive to prove willfulness. Willfulness exists when the responsible person (1) must have, or should have been, aware of the outstanding taxes, and (2) either intentionally disregarded the law or was plainly indifferent to its requirements. Paying off creditors when the business is unable to satisfy its payroll tax obligations indicates willfulness.

Making matters worse, there is also potential for criminal liability. Payroll tax embezzlement is a felony punishable by up to five years in prison.  Although options exist to resolve payroll tax liability, such as an offer in compromise, installment agreement, the IRS appeals process, or litigation, these options can be drawn out, complex, and expensive. Thus, it is in a business’ best interest to take its duty to collect and pay payroll taxes seriously.

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  • 26 Jul, 2017
  • Karina Torres
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