WHY KEEPING CURRENT ON PAYROLL TAXES SHOULD BE A TOP BUSINESS PRIORITY
BY STEVEN V. MELNIK
STEVEN V. MELNIK, J.D., LL.M. (Tax), CPA, is an associate professor of tax law and the academic director of the graduate and undergraduate tax areas at Baruch College, CUNY in New York City. He is licensed to practice law in New York and New Jersey, and has more than 15 years experience helping individuals and businesses with tax, asset protection, and estate planning matters. This article is an adapted version of a chapter from his best-selling book, Tax Relief and Resolution: The Ultimate Guide to Paying Less to the IRS Starting Now (Flamenco Press, 2014).
A business is responsible for ensuring that taxes withheld from its W-2 employees’ payroll checks are paid. As an employer, a business is also liable for Social Security and Medicare payments and taxes and its employees’ contribution to these taxes. Staying current with payroll taxes should be a top priority for all businesses.
Typical wages subject to federal employment taxes include salaries, vacation allowances, bonuses, commissions, and fringe benefits. Employers are required to make payroll tax deposits either monthly or quarterly. In general, a business must deposit all federal income taxes withheld from its employees’ income, and both the employer and employees’ Social Security and Medicare taxes. A business is then required to file employment tax returns on Form 941 for each quarter, and on Form 940 at the end of the year.
A business’s issues with IRS are often the result of its failure to remit payroll taxes in a timely manner. This is a common way for a business to stay afloat because a payroll tax debt can stay invisible for a year before IRS will start contacting a business owner. An employee rarely verifies whether his or her withholdings have been paid to IRS on his or her behalf. However, the chaos that can be created for a business can be catastrophic as thousands and thousands of dollars in missed payments build up.
Resolving payroll tax debt. If an employer owes $10,000 or less in payroll taxes, the liability can be resolved with IRS’s Business Account Customer Service Department (Business ACS). First, a business must be compliant by filing all required tax returns. It can then choose to resolve its account through a streamlined installment agreement or, if it no longer has active payroll or W-2 employees, by being granted currently not collectible status. Streamlined installment agreements do not require a financial statement; currently not collectible status does. A business’s information can be provided on a Form 433-B, which can be printed from IRS.gov, or to an IRS representative over the phone.
If an employer owes more than $10,000 in payroll taxes, has unfiled employment tax returns, or has a consistent pattern of noncompliance, IRS will be far more aggressive. It may even assign the case to a revenue officer. If a revenue officer is assigned, he or she may arrive on the business’s doorstep for a field visit. A revenue officer will request a financial statement on a Form 433-B to determine a business’s ability to pay any taxes owed. The officer will require that all payroll tax deposits be made and employment tax returns filed.
In most cases when a revenue officer is assigned, a taxpayer will enter into either an installment agreement or a streamlined installment agreement, if applicable. The length of time of either will be no longer than 24 months. It is unusual for a revenue officer to place an employer on currently not collectible status when a business is still in operation. In rare cases, an in-business currently not collectible status may be granted to allow a company to remain in operation.
Trust fund recovery penalty. A Code Sec. 6672 trust fund recovery penalty is not related to what one normally thinks of as a trust for a taxpayer’s assets. This type of trust has nothing to do with a taxpayer’s future comfort. In fact, it has a very large penalty possibility attached to it. A trust fund recovery penalty (TFRP) is assessed against a taxpayer who was responsible for remitting money to IRS on behalf of others (either an individual or an individual’s company) but failed to do so.
Assessment of a TFRP is used by IRS to encourage employers to promptly pay their taxes. Whoever within a business collects taxes on behalf of IRS, and fails to forward them on, will find Code Sec. 7501 comes into play. Code Sec. 7501 provides that: “Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States.” Revenue officers assess and collect unpaid taxes against those who do not collect and forward them to IRS. The TFRP is equal to 100% of the unpaid taxes held in trust, which means that the unpaid amount could double.
Personal liability for business debt. When it comes to collecting back payroll taxes, IRS will pursue anyone who it believes was responsible for ensuring that the payments were made. To be liable for the TFRP, the law says that a person must have had a duty to collect and pay the taxes and willfully failed to do so. If a business’s payroll tax payments were ignored, the revenue officer will be aggressive in imposing the penalty rather than allowing someone to get away with it.
In all TFRP cases, the revenue officer will require information to determine which individual or individuals were responsible for making the payroll tax deposits or payments. The officer will meet with those individuals and conduct a TFRP interview to determine:
- Whether the individual was responsible for collecting and making the required payroll tax deposits or payments.
- Whether the individual willfully failed to collect or make the required deposits or payments.
A person is responsible for making payroll tax deposits if he or she had the duty or power to perform the task of collecting and making the required deposits or payments. The person responsible will usually be the business owner, CPA, CFO, an officer, or an employee charged with this responsibility. IRS will also find willfulness when the person responsible was aware or should have been aware of the outstanding taxes, and intentionally disregarded the law, or was indifferent to its requirements. IRS does not require that the person have an evil intent or bad motive to disregard the law for willingness to be found.
Once the revenue officer makes a determination of who should be held responsible, a letter will be mailed stating that a TFRP will be assessed. A taxpayer will be given 60 days to file an appeal (75 days if a taxpayer resides outside of the U.S.). The letter will also explain the business’s appeal rights. IRS Publication 5 contains further details and instructions on how to prepare and file an appeal.
If a business does not appeal, or if its appeal fails, a TFRP will be assessed and cannot be removed until the debt is paid in full, or through the filing and acceptance of an offer in compromise. Once IRS has a taxpayer in its sights and the TFRP is assessed, it may then take collection action against a business or individual personally. This means it can issue levies, wage garnishments, or liens, or initiate the seizure of assets.
Distancing a business from TFRP. The best way to avoid having a TFRP assessed against a business is to keep the business compliant and viable. This can be done by ensuring that the business is:
- Making all payroll tax deposits in a timely manner.
- Filing all required employment tax returns promptly.
- Paying any balances due immediately.
If a revenue officer is assigned to a business’s case, it is best to comply with all requests and provide any documentation by the required deadline. A business’s cooperation and willingness to change its past practices will be beneficial and may help to avoid a TFRP assessment.
Liabilities if a business closes. If taxes are owed when a business closes, IRS will be on the hunt. The IRS will most likely first seek payment from an owner of the business. After a business closes, IRS will undertake a collection action against the individual or individuals held responsible for the TFRP if the business is not able to pay off its tax debt in full. It will then require financial information from each person against whom the TFRP was assessed.
When a TFRP has been assessed against two or more individuals, the tax debt is a joint and severally liability. This means that IRS may collect all of the tax debt from any of the individuals. This is typically done when one individual has little or no funds or assets while the other (or others) has the ability to pay the tax debt in full. The individual from whom the full tax debt is collected may seek reimbursement from the other individual or individuals involved.
Conclusion. It is important that a tax professional does everything possible to resolve any debt a client has in this area. Payroll taxes should be as critical as a mortgage or rent payment and located at the top of the to-do list.