Owning or running a business is a lot of work. With few exceptions in the U.S., business owners and managers are responsible for a variety of functions, including payroll, wage withholding, and paying withheld employment taxes to the Internal Revenue Service (IRS), in addition to running the business.
It can happen that an IRS audit reveals that payroll taxes have not been paid, or were not paid in certain years. If you receive an audit letter from the IRS and you know you are in arrears on payroll taxes, speak to an experienced tax attorney before you proceed with the audit. You can also learn more about the purpose and process of audits by reading our guide, A Tutorial on IRS Audits.
We recently discussed how the IRS makes employment tax fraud a high priority. Employer payroll taxes allow workers to qualify for social service benefits, and the money funds social and other important government programs. The IRS does not ignore missing payroll taxes once identified. Serving as both a deterrent and a means to assess missing taxes to responsible parties, the Trust Fund Recovery Penalty (TFRP) is a key collection tool well worth understanding.
There is a process that the IRS undertakes when it discovers a shortfall in employer taxes due. Part of that process may include interviews with business owner(s), accountants, or employees charged with collecting, reporting, and paying over withheld employment taxes. Another aspect could be an IRS criminal tax investigation. Ultimately, the question becomes how much in payroll taxes is missing and who is going to pay it.
The TFRP generally equals the unpaid trust fund portion of employment taxes, including the income taxes and employee share of Social Security and Medicare taxes that an employer was required to withhold and pay over to the IRS. Interest is assessed on the amount owed. IRS Form 4180 is the basis for interviews of individuals who may be found liable for the TFRP. IRS Notice 784 offers a straightforward overview of how the IRS pursues missing payroll taxes.
The so-called “corporate veil” cannot protect owners, corporate directors, staff members, or accountants if they are found to have willfully failed to fulfill their responsibility to direct or actually withhold and pay over employment taxes. Once you are assessed, you will receive a Notice and Demand for Payment, after which the IRS can file a federal tax lien or a levy to collect the sum owed from your bank accounts, salary, and other personal assets, subject to applicable exemptions.
Even if a “trusted” employee embezzled payroll withholding, the IRS may look beyond that employee to determine who was responsible for collecting, accounting for, and paying over the taxes. An owner or other individual determined to be a responsible person who willfully failed to meet those obligations could be personally liable for the TFRP.
If you know you are out of compliance with payroll taxes, or if the IRS has already approached you about recovering payroll taxes, reach out to our legal team. We deliver strong, strategic legal representation whether you are concerned about IRS interest in your business or are facing charges.
Contact us today at 440-250-9709. We serve clients internationally and in Northeast Ohio, Chicago, and New York City from our offices in Cleveland and Chicago.