Collecting and paying payroll taxes is typically handled by a business owner, manager, accountant or outsourced vendor. A critical point to understand is that an owner does not escape responsibility for the accurate collection, reporting and payment of employment taxes by delegation. The Trust Fund Recovery Penalty (TFRP) is a tool the IRS can use to collect personally from a business owner or director.
In addition to supporting federal programs, employment tax compliance protects business owners from personal exposure if payroll taxes are not properly remitted. Below is basic information about payroll tax fraud. For a more detailed overview, see our guide, "Employment Tax Fraud: What Every Business Owner Needs to Know."
Consider the following:
The U.S. tax gap is the amount of tax liability owed but not paid on time by U.S. taxpayers. The current tax gap, from 2022 figures, suggests approximately $127 billion in employment taxes are not paid on a timely basis.
While failure to collect, report and pay employment taxes contributes to the tax loss, several schemes are used by employers to avoid paying their full payroll tax liability. These include paying cash under the table, misclassifying employees as contractors, abusive S corporation schemes, and filing false tax returns.
Intentional actions taken to avoid paying a legitimate employment tax liability may constitute tax evasion. A common scheme involves collecting payroll taxes from employees and either failing to remit them to the IRS or remitting less than the full amount owed .
Businesses may be selected for an IRS audit for various reasons, including unpaid or underpaid employment taxes. If you receive a notice of tax audit and are aware of potential payroll issues, preparation before responding to the IRS is essential.
The IRS expects straightforward and well-prepared records during an audit. Employment tax fraud is difficult to conceal and costly to correct. If you have concerns about payroll compliance, it is important to work with your legal counsel to develop a plan before responding.
If you are involved in a tax crime, your best defense is knowledge and a highly skilled legal tax defense. If you believe you are being surveilled by the IRS, making good choices matters. Call us at 440-250-9709 or request a consultation. We serve domestic and international clients from our offices in Cleveland and Chicago.