One of the worst tax violations is the failure of an employer to remit payroll taxes it has withheld from its employees’ pay.
Despite its gravity, it is also one of the most frequent tax problems we encounter.
Payroll Tax Delinquencies are Treated Harshly
The IRS is required by law to give employees the benefit of all taxes withheld by their employers whether or not such taxes were remitted to the government.
In short, when an employer fails to turn over withheld taxes the IRS loses money.
Withheld Taxes are Held in Trust for the Government
The payroll taxes an employer holds back from an employee (the “Trust Fund”) never belong to the employer, but rather are held in a constructive trust for the federal government.
Thus, every employer is a Trustee whose sole beneficiary is the United States. As a Trustee, the employer has a fiduciary duty to properly report and turn over all withheld taxes.
If you don’t do it, it is considered by the feds to be theft of government funds.
Installment Payment Plans for In-Business Taxpayers
Employers who are behind in their payroll tax deposits can count on immediate and aggressive collection action by the IRS.
There is good reason for this: The IRS is concerned that a delinquent payroll tax employer who is still in business will continue to use the Trust Fund for its own purposes.
The IRS calls this “pyramiding” and if you keep doing it you could end up in one.
Fortunately, there is a solution:
If the business can show that it has corrected the problem and is now keeping current with its payroll tax deposits and can show that it is profitable enough to remain current and make payments on the unpaid payroll taxes (plus penalties and interest), the IRS will consider an Installment Payment Agreement.
The Trust Fund Penalty
The IRS is empowered to assess a penalty against individuals who are deemed responsible for the failure of the business to remit payroll taxes.
This penalty is called the Trust Fund Penalty because it imposes a fine that is equal to the portion of the payroll taxes that was withheld from employees’ pay and held in trust for the government.
The IRS often assesses the Trust Fund Penalty against people within the organization who were neither shareholders or officers.
The Trust Fund Penalty may be assessed against more than one individual.
Related Posts:
The Five Biggest Payroll Tax Mistakes of Small Business Owners
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1 IRS Files $800 K Lien Against John Kerry for President Campaign // Jun 4, 2009 at 10:43 am
[...] What Happens if Your Business Hasn’t Made its Payroll Tax Deposits [...]
2 Arul & Associates LLC » 11 Financial Mistakes – Part 2 // Nov 5, 2009 at 9:10 pm
[...] year taxes by December 31, then you can be assessed penalties. And if you handle your own payroll, not remitting payroll taxes (employee withholding) is a serious crime with penalties to the INDIVIDUALS responsible (yes, even if it was a [...]
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