If you own a business and have employees then you likely familiar with the requirement to remit payroll tax to the IRS. When an employer pays compensation to their employees, they are required to withhold certain taxes and remit these taxes to the IRS. When the employees file their tax returns, the IRS is required by law to give those employees the benefit of all taxes withheld by their employers whether or not such taxes were remitted to the government. If an employee is given a W-2 that reflects withholding, they can file their tax returns and receive a refund even if the employer has failed to remit their portion of the taxes. In essence, the payroll taxes an employer holds back from an employee never belong to the employer, but rather are held by the employer for the benefit of the federal government. Thus, the IRS pursues collection of payroll tax penalties more aggressively than penalties on most other taxes because the employee portion of these taxes constitutes a trust fund.
If an employer fails to send the IRS the payroll taxes they collected from their employees, the IRS levies a penalty in the amount of 100% of the unpaid payroll taxes against all responsible persons who willfully fail to collect and turn over the money. This penalty for the failure to withhold or remit payroll taxes is known as the Trust Fund Recovery Penalty (TFRP). It allows the IRS to hold individuals associated with a business personally liable for 100 percent of the unpaid amount when the business fails to meet its payroll tax obligations. The TFRP applies to employee funds that the employer holds in trust for the IRS, which include all of the regular income tax withheld and the employee half of the FICA tax, but not to the employer portions of payroll taxes.
The penalty for failure to remit payroll taxes can be particularly severe because the IRS considers an employer who fails to pay these taxes to be violating a trust and, in essence, stealing from the employees and the government. The TFRP can be applied in addition to civil and criminal penalties, including the seizure of business assets and forced closure of the business, and since it is a penalty rather than a tax, the TFRP is not erased by bankruptcy. In recent years, the government has stepped up its efforts in prosecuting employers for their failure to pay employment taxes. Any person required to collect, account for, and pay employment taxes to the government who willfully fails to do so may be charged with a felony and, if convicted, may be fined up to $10,000, imprisoned up to 5 years, or both, and may also be liable for the cost of prosecution.
There are several options available to settle a payroll tax debt with the IRS. These may include: installment agreements, partial payment agreements, declarations of financial hardship, and offers in compromise. Additionally, if any of the employees were independent contractors, there may be the possibility of a reduction in amounts owed. Finally, depending on when business tax returns were filed, there may be amounts assessed that are outside the applicable statute of limitations.
It is important to get a payroll tax matter resolved at the earliest possible opportunity, before the consequences become increasingly severe. The IRS will continue to add penalties and interest to a delinquent account until the matter has been fully resolved. If you have a payroll tax issue, contact an Attorney in Jacksonville to discuss your options today.