According to a report issued by the U.S. Government Accountability Office, 1.6 million U.S. businesses owe the IRS more than $58 billion in payroll taxes, penalties, and interest. Is your business one of them? These owed payroll taxes account for around 20% of all owed taxes so far this year. And around 25% of payroll taxes owed are from businesses that haven’t paid payroll taxes for more than three years.
In a down economy, IRS is slower to collect money from taxpayers. Thus, it’s often more tempting for a business to pay for their products, rent or electricity before their taxes. In fact, it’s not unusual for a business to owe a couple hundred thousand dollars in payroll taxes. Taxes are often the first thing businesses stop paying for. But if you don’t pay payroll taxes, don’t be surprised if six to nine months later, the IRS appears on your doorstep. When the Revenue Officer appears on your doorstep, know that they are looking out for the IRS’ interests. Do you know how to look out for your own?
Many times, large payroll tax problems start small. They begin when a business starts missing an increasing number of payroll tax deposits until they stop filing them altogether because of fear that if they file one, the IRS will notice ones that they’ve missed. Even though you shouldn't miss any payroll tax payments, if you do start missing them, contact a tax professional right away to get the problem stopped and get on your way to getting the owed taxes repaid.
When an employer gives paychecks to employees, that employer is a trustee for the United States government. Payroll taxes are known as “trust fund taxes” and belong to the U.S. government. Employers should not use payroll taxes to pay for salaries or other expenses, yet sometimes this happens. When an employer does not pay withheld payroll taxes, that is, an employee’s federal income tax and share of Medicare and FICA to the U.S. government, a penalty known as a Trust Fund Recovery Penalty (TFRP) equal to all of the owed trust fund taxes is assessed by the IRS on those responsible who willfully do not account for, collect, or pay the taxes after these individuals have gone through a 4180 Interview.
Taxpayers who owe payroll taxes need to meet with the IRS officer for the 4180 Interview. During the interview, the IRS will try to find out who is responsible for the debt. The IRS can collect payroll taxes from anyone that they believe is responsible for not paying taxes. The IRS can single out the business owner or a business bank account check signer to collect money from. Individuals can be held personally liable. If the IRS decides that a business cannot pay its past due payroll taxes, they go after individuals who they believe to be responsible for the unpaid taxes. The business or individuals responsible are assessed a Trust Fund Recovery Penalty. If you find yourself with a Trust Fund Recovery Penalty, you’ll need to hire a firm that can help with this type of tax problem. If you have a business in Montana, North Dakota, South Dakota, or Wyoming, consider Billings, Montana-based Centsable Accounting.
A trust fund recovery penalty is a penalty for 100% of the payroll taxes owed plus interest for not paying the payroll taxes. The trust fund recovery penalty may be appealed by the taxpayer or paid. The penalty may be paid by the taxpayer, other people responsible for not paying the payroll taxes, through an installment agreement, or through an offer in compromise. If individuals responsible cannot pay the TFRP upfront, the IRS has multiple methods they may use to collect the unpaid taxes
The IRS may collect the Trust Fund Recovery Penalty from individuals responsible by:
• Garnishing salary
• Garnishing pension retirement payments
• Seizing IRA assets
• Collecting after a bankruptcy is finalized
• Seizing and selling taxpayer’s property up to the amount of the unpaid taxes
• Seizing estate assets of a person responsible who dies before the payroll tax issue is resolved
The IRS may collect the entire payroll tax amount at the same time from every single person responsible. However, the IRS will only keep 100% of the payroll taxes and interest owed. There’s a statute of limitations when all people responsible can file a refund claim. The IRS keeps excess payments until the statute of limitations is over and then issues refunds.
Different states have specific policies on payroll taxes, especially for employees working within and outside the state. Montana employers paying wages, for example, need to withhold the Montana state tax. Nonresident Montana employers need to withhold tax from wages for services that are provided within Montana. The state of Montana has a reciprocal agreement with the state of North Dakota where Montana employers don’t need to withhold Montana income tax from employees that live in North Dakota. States are different so be sure to check with a tax professional if you have a question about when and when not to withhold payroll taxes.