Delinquent Payroll Taxes

One of the worst tax violations is the failure of an employer to remit payroll taxes it has withheld from its employees’ pay. Despite its gravity, it is also one of the most frequent tax problems we encounter.

Payroll Tax Delinquencies are Treated Harshly

The IRS is required by law to give employees the benefit of all taxes withheld by their employers whether or not such taxes were remitted to the government. In short, when an employer fails to turn over withheld taxes the IRS loses money.

Withheld Taxes are Held in Trust for the Government

The payroll taxes an employer holds back from an employee (the “Trust Fund”) never belong to the employer, but rather are held in a constructive trust for the federal government. Thus, every employer is a Trustee whose sole beneficiary is the United States. As a Trustee, the employer has a fiduciary duty to properly report and turn over all withheld taxes. If you don’t do it, it is considered by the feds to be theft of government funds.

Installment Payment Plans for In-Business Taxpayers

Employers who are behind in their payroll tax deposits can count on immediate and aggressive collection action by the IRS. There is good reason for this: The IRS is concerned that a delinquent payroll tax employer who is still in business will continue to use the Trust Fund for its own purposes. The IRS calls this “pyramiding” and if you keep doing it you could end up in one.

Fortunately, there is a solution: If the business can show that it has corrected the problem and is now keeping current with its payroll tax deposits and can show that it is profitable enough to allow it to remain current and make payments on the unpaid payroll taxes (plus penalties and interest), the IRS will consider an Installment Payment Agreement.

The Trust Fund Penalty

The IRS is empowered to assess a penalty against individuals who are deemed responsible for the failure of the business to remit payroll taxes. This penalty is called the Trust Fund Penalty because it imposes a fine that is equal to the portion of the payroll taxes that was withheld from employees’ pay and held in trust for the government. The IRS often assesses the Trust Fund Penalty against people within the organization who were neither shareholders or officers.

The Trust Fund Penalty may be assessed against more than one individual.

Additional Note: Payroll taxes (Trust Fund) refer to the Social Security tax and the Medicare tax. Social Security taxes are designed to provide benefits for retired workers, the disabled, and the dependents of both. Medicare taxes are designed to provide medical benefits for certain individuals when they reach age 65.

Again, failing to properly file and pay payroll taxes is a serious matter. Not only can the IRS go after the company’s assets but, in certain circumstances, it can also go after Owners, Officers, and certain employees. This means that if you, or someone else within your business, are found to be willfully responsible for the business’s failure to pay payroll taxes you could be held personally liable for a portion of the tax up to and including very stiff fines and possible incarceration.

The IRS must first make an investigation and, assuming it makes an assessment against you or other employees of your company, it can then begin collection efforts aimed at your personal assets. This would include bank accounts, property, and other items of value. In some cases, the IRS may liquidate the company and sell its assets in order to satisfy the tax debt, meaning they can and will shut down your business to satisfy your tax obligation.