As an employer, you’re responsible for withholding and remitting payroll taxes. But what happens if they aren’t paid?
If you’re answerable for payroll taxes, the buck stops with you! And if others handle that, such as a bookkeeper, an assistant, a payroll person, any senior-level person is considered liable for any unpaid payroll taxes. The IRS can cast a wide net of who bears responsibility. And if you’re a family business, that could involve a spouse, brother or sister, or your children. Or close friends who might be private lenders.
In many of our client’s cases, since the money is not immediately paid to the IRS, diverting it elsewhere was because of more pressing business issues that required immediate payment, or maybe a necessary capital investment. The business owner and management team will elect to ‘rob Peter to pay Paul’, with the intent of replenishing what was taken.
But sometimes, the gamble doesn’t pay off – the situation snowballs. The IRS comes knocking, and the trouble begins.
Or, it could be outright theft or neglect from the party responsible. Either way, it must be resolved as quickly as possible.
Who is responsible for unpaid payroll taxes?
It comes down to what the IRS calls a “responsible” person. When a business fails to remit payroll taxes, the IRS has the ability to collect said taxes from whoever they deem are “responsible persons.” So, what counts as a responsible person?
A responsible person is anyone within or outside of the business with significant control or influence over the company’s finances. According to the IRS, this can include a single person or a group of people who have the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.
"Jerry and his team solved my tax problem perfectly and saved me a LOT of money in the process. I had spent a couple of years with a firm that pretty much didn't do a whole lot (except take my money) and I watched my debt grow huge with penalties and fees. After I quit them, the IRS started hounding me again, and it was just unbearable. Jerry took the reins, analyzed my problem, and worked out a fantastic deal with the IRS very quickly, unlike the other firm. I'm so happy, I can't say enough. Thank you, Jerry, thank you!” —
In many cases, from what we’ve seen with our own clients in particular, there are a lot of family-run businesses where family members (and close family friends) have officer titles and wear many hats. Any and all of these individuals, if they handle or manage payroll at all, are responsible in the eyes of the IRS. To avoid dragging any of your loved ones under the scrutiny (and penalization) of the IRS, once you’re aware of an unpaid payroll tax issue, it needs to be resolved as swiftly as possible!
The employee portion of Social Security and Medicare taxes and income taxes are considered “trust fund taxes” because you withhold them from employee wages and hold them in a “trust” until they need to be paid to the IRS.
A responsible person or persons may be one of the following:
Trust Fund Recovery Penalty
If the payroll taxes are not paid in the correct amount and on time by whoever is responsible for handling that, the IRS can impose a hefty penalty called the Trust Fund Recovery Penalty (TFRP).
The employees’ total withholdings (the employee portion of FICA tax and income taxes) are the taxes subject to the TFRP.
The TFRP may be assessed against anyone who:
For willfulness to exist, the responsible person must have:
“Willfulness” plays a huge role in whether a “responsible person” can be held liable for a business’s unpaid payroll taxes.
In short, the IRS can impose the Trust Fund Recovery Penalty on any person who is “responsible” for paying the business’s payroll taxes and willfully fails to do so.
How much is the penalty?
The TFRP can be pretty hefty. The penalty is normally 100% of the taxes withheld and not remitted to the IRS. The TFRP can basically double the original tax liability.
For example, say the business owes $7,000 in payroll taxes to the IRS. The TRFP amount is also $7,000 (100% penalty added onto what’s already owed), meaning that the responsible person would owe the IRS $14,000 total.
Failing to pay payroll taxes can also lead to criminal charges, jail time, and a shuttered business. It’s very serious stuff and needs to be remedied ASAP! You have to get protection.
“My wife and I run a small, successful business, but we ran into trouble with the COVID lockdowns. It hurt our bottom line a lot and I also lost a number of employees as well. Those who kindly remained wound up having to work double-time and we had to pay them extra, just to keep things running. That’s where trouble began and we got in over our heads in tax debt. Jerry showed us how to remedy the problem the right way and how to avoid that situation ever again. He did everything for us, and we’re grateful, and breathing easier.”
TFRP and the Social Security tax deferral
So at this point, you may be wondering, What if I’m deferring the employee portion of Social Security tax under the August 8, 2020 executive order? If you’re taking advantage of the Social Security tax deferral, the employee portion of Social Security tax will not be considered unpaid if you pay it back on time.
As a reminder, the deferral period takes place between September 1, 2020 – December 31, 2020. And, you have between January 1, 2021 – April 30, 2021, to remit the deferred employee SS tax portion to the IRS. If you fail to repay the deferred employee SS tax by April 30, 2021, you will be penalized.
The IRS will demand the TFRP and the original amount owed
If the IRS determines someone to be a responsible person, they will send that person a letter stating that they plan to assess the penalty against them.
Once the responsible person receives the letter, they have 60 days from the date of the letter to appeal. If the responsible person does not respond to the IRS’s letter, the IRS assesses the penalty against them and sends a “Notice and Demand for Payment.”
If payment is not made, or the demands are ignored, this is the point where the IRS dips into its arsenal of weapons, such as liens and levies, and will use them against you, your business, and even your clients, to garner payment.
What about the employer portion of payroll taxes?
The TFRP only applies to the employee portion of payroll taxes. So, who’s responsible for the unpaid employer portion of payroll taxes?
Instead of making a personal assessment against anyone who is “willful” or “responsible,” the IRS can only look to the actual business to recover this portion of the payroll taxes.
This is a problematic situation with a lot of moving parts, so it behooves you to get things remedied immediately, before the IRS pulls out the big guns. If you’re the responsible party, we suggest you deal with it right away. If someone else or a group handles this, you need to get to the bottom of how and why the problem exists in the first place, and appease the IRS.
That’s where we come in. We know how to speak to the IRS.
You need someone able to review your situation and determine if it truly is a matter of unpaid payroll taxes – and if so, get the matter remedied to the IRS’s satisfaction.
We may find that you qualify for an Offer in Compromise for unpaid payroll taxes, and in that case, you may be able to avoid repaying the full employer portion. Or there may be a better solution that works for both you and the IRS – that’s where our ability to speak their language comes in handy.
Turn over dealing with the IRS to us and get behind our shield of protection. Schedule a Free consultation using one of the contact methods below.
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Phase 1: Discovery and Investigation
Step 1: Discovery – A FREE 15-minute call. We’ll ask you a few questions to determine the best way we can help you, so you can decide if we’re the right choice for you.
Step 2: Transcript Investigation – If you want us to help you, the next step is to get your IRS tax transcripts. It’s the information and filing records the IRS is using against you. It’s the foundation for us to develop a resolution plan for your specific situation.
The investigation will also tell us if the IRS considers you compliant or non-compliant. If you’re non-compliant, you cannot negotiate or make any offers to the IRS. We can work with you and the IRS to get you compliant, if that’s needed.
And lastly, we search to find out if the IRS has any open investigations on you that you’re not aware of.
Phase 2: Protection, Resolution Strategy, and Compliance
Step 1: Protection – This means you assign your tax problem to us. By executing a Power of Attorney, it informs the IRS Revenue Agents and Officers assigned to your case, that you’ve assigned us as your fiduciary to handle your situation.
We take over all communication with the IRS at this point. You focus on your day-to-day life. We keep you posted on what’s going on.
Step 2: Resolution Strategy – Having a clear understanding of your status with the IRS, we’ll create a resolution plan and discuss it with you. We’ll know if an Offer in Compromise is possible. There could be a better option. We’ll also know the Statute of Limitation for your situation – in some cases, it’s better to wait things out. You’ll have a clear picture of the outcome, and the cost to get you there.
Step 3: Compliant or Non-Compliant – Being “compliant” means that all tax returns for every tax year are filed and there are no issues. This is the point where, if you are non-compliant, we need to get you compliant. The IRS will not negotiate until you are compliant. This step is required before any offers can be submitted. We’re an IRS-proof CPA firm, we’ll get you compliant.
Phase 3: Resolution, Keeping You Protected, Celebrate
Step 1: Resolution – Once the IRS considers you compliant, we’re able to start negotiating with the IRS and get you the best possible deal. We push until we can’t push any further.
Step 2: Keeping You Protected – Keep in mind, while all this is happening, the Power of Attorney is protecting you as long as you’re meeting your obligations. We’ll continue handling all the IRS letters and calls. We’ll always keep you up to date on what’s going on via email and/or calls.
Step 3: Celebrate – Once we receive a final agreement from the IRS, we want you to celebrate and we’re going to help. You’ll receive a gift from us to get the celebration started.
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Just click on whichever method of contact you prefer!
We want to dedicate our time to you.
For your convenience, you can schedule a
date and time for us to call you.
If your matter is extremely urgent and you
need to talk to an IRS
Tax Defense Consultant now.
We look forward to speaking with you and solving your tax debt matter!
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