Federal payroll or employment taxes include income taxes, social security, and Medicare taxes that are withheld from the wages of employees. These are also commonly referred to as “Trust Fund” taxes because the employer is supposed to hold these funds in trust before turning them over to the IRS.
An Employer’s tax filing obligations for payroll taxes are extremely inflexible. Generally speaking, employers must (1) make monthly tax deposits on the 14th of each month with the IRS, (2) file Form 941, Employer’s QUARTERLY Federal Tax Return, by the end of the month following the end of each quarter, i.e., April 30, July 31, October 31 and January 31, and (3) file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return by January 31 following each year to account for all payroll taxes withheld and remitted to the IRS by an employer from its Trust Fund. When a business does not pay its employee withholding taxes, the IRS can collect the tax from the “responsible person” who could have paid the taxes but chose not to. This tax is referred to as the Trust Fund Recovery Penalty and it is allowed per Internal Revenue Code section 6672.
Section 6672 allows the IRS to personally assess “responsible persons” for a company’s unpaid federal payroll trust fund taxes owed to the United States Treasury. “Responsible persons” include those responsible for collecting, accounting for, and paying over trust fund taxes who (1) willfully fail to collect and pay over such tax, or (2) fail to truthfully account for such tax, or (3) willfully attempt in any manner to evade or defeat any such tax or the payment thereof.
Payroll trust fund taxes include income tax, social security, and Medicare amounts withheld from an employee’s wages. Note that it does NOT include the employer’s portion of payroll taxes. Any individual who is or was responsible to pay the IRS payroll taxes, but willfully failed to pay the IRS, is personally liable.
Willfulness is defined as intentional, deliberate, voluntary, and knowing, as distinguished from accidental. “Willfulness” is the attitude of a responsible person who with free will or choice either intentionally disregards the law or is plainly indifferent to its requirements.
Some factors considered by the IRS when determining willfulness include:
- Whether the responsible person had knowledge of a pattern of noncompliance at the time the delinquencies were accruing;
- Whether the responsible person had received prior IRS Notices indicating that employment tax returns have not been filed, or are inaccurate, or that employment taxes have not been paid;
- The actions the responsible party has taken to ensure its Federal employment tax obligations have been met after becoming aware of the tax delinquencies; and,
- Whether fraud or deception was used to conceal the nonpayment of tax from detection by the responsible person.
But, having said all that, the willful element is satisfied if a company paid other creditors while failing to pay the payroll taxes due to the IRS.
If the employer is either an S Corp or C corporation, responsible persons are not personally liable for the employer’s portion of the tax (1/2 of FICA) but they are liable for the remainder of payroll taxes. On the other hand, if the employer is self-employed or a single-member LLC that files a Schedule C with his or her Form 1040, a responsible person can be held liable for the full amount of payroll taxes, i.e., both the employee’s withheld taxes and the employer’s portion of payroll taxes.
The IRS typically begins Trust Fund Recovery Penalty investigations by serving a company’s bank with an administrative summons demanding copies of bank account signature cards and a selection of copies of canceled checks to determine who signed checks for the company. The IRS also searches public records to determine who owns the business, and any officers, partners or members. This allows the IRS to make its determination as to which individuals are liable for Trust Fund Recovery Penalties. Usually the company’s owners, CEO, CFO, Controller, check signatories and employment tax return preparers make the list as possibly liable. The IRS will continue to build its case file by demanding that all individuals that might be liable for Trust Fund Recovery Penalties submit to an in-person interview. This interview process allows the IRS to complete Form 4180, “Report of Interview with Individual Relative to Trust Fund Recovery Penalty”, which the interviewee must sign as factually accurate. We always advocate that Officers and employees that are requested to appear and take part in the interview process decline such requests as the interview process is a virtual minefield. Rather, such officers and employees should engage a tax attorney to represent them instead.
If the IRS determines that you are liable for the Trust Fund Recovery Penalty as the responsible person and issues a determination letter (IRS Letter 1153) you must file a written appeal within 60 days of the date indicated on the letter. This appeal should always be filed using certified mail, return receipt requested; and, you should retain this proof of mailing throughout the appeal process. Failure to file an appeal within 60 days of the date on the IRS Letter 1153 will result in the IRS issuing an assessment against you personally for the Trust Fund Recovery Penalty, and bars any opportunity to challenge the Trust Fund Recovery Penalty liability administratively before IRS, the U.S. Tax Court or a U.S. District Court. Currently, it is taking IRS Appeals six to twelve months to schedule and conduct an appeal conference, followed quickly by an IRS Appeals’ Decision Letter determining whether a person is liable or not and the amount.
Although the IRS will often assess a Trust Fund Recovery Penalty against one or more individuals, oftentimes there is an advantage in filing an IRS administrative appeal. If evidence exists that a person was not responsible to pay the company’s payroll or employment taxes or did not willfully fail to pay, the Trust Fund Recovery Penalty liability should be challenged. In other cases, the IRS may have incorrectly computed the liability amount, so the amount should be challenged. Whatever defense arguments can be raised, adequate evidence must also be presented to IRS Appeals. In addition, it is important to request that the appeals conference be recorded just in case a complete record is later needed.
Failure to properly account for any part of a company’s payroll tax obligations or failure to properly deposit them on the 14th of each month with the IRS is considered tantamount to theft of monies owed the U.S., a serious violation by the Service. Thus, IRS enforcement efforts have steadily increased over the years with respect to those who violate payroll tax laws. In some cases, the IRS has even started prosecuting people for payroll tax evasion through its Criminal Investigations Division when they have failed to comply with payroll tax return filing and remittance requirements.
That is why it is so critical that you contact a tax attorney as soon as you learn that payroll tax deposits have not been made or payroll tax returns have not been filed. We will perform a detailed review of the facts and circumstances surrounding your potential liability in your initial client visit. Then, based on that review, we immediately begin to formulate a customized strategy to resolve your payroll tax problems with the IRS.
For more information or to schedule a free initial consultation with Rex Halverson, please contact him at (916) 444-0015 or via email at email@example.com.