As a business owner, you are legally responsible for calculating the payroll taxes that are owed to the IRS, both by your business and your employees. You must pay these taxes to the IRS on a certain schedule, depending on the size of your business. There are substantial penalties and ramifications if you fail to pay the IRS the full amount and on time. There is even a possibility that you could even be personally liable to the IRS for these taxes as the business owner. Additionally, criminal liabilities may accrue to a business owner for failure to collect and pay over to the IRS payroll taxes. Always speak with a payroll tax attorney from Thorgood Law Firm if you are informed you have any payroll tax issues with the IRS.
The Legal Obligation to Pay Payroll Taxes
In general, payroll taxes are an obligation of both your business and employees. The employee’s share of the payroll taxes is deducted from their paycheck. Both the employee and employer’s portion of these taxes must be paid to the IRS. You are required to file a Form 941 with the IRS quarterly to detail the payroll taxes that have been paid. You cannot delay in either paying these taxes or filing the form.
There are several payroll taxes that you mustex deduct that go to federal trust funds:
- Social security taxes (both the employer and employee share is 6.25%)
- Medicare taxes (both the employer and employee must pay 1.45% of the income, with a higher Medicare tax for those above a certain income level)
The IRS has the potential to determine whether businesses have not paid their payroll taxes. They can conduct data analysis and audits, or they may receive information from the Social Security Administration. Either way, the IRS will almost certainly know when an employer has not met their payroll tax obligations.
What Happens if You Do Not Pay Payroll Taxes?
Your business can face serious legal issues if you fail to make these payments. These issues can even flow through to you if you own or control a business. The IRS has a powerful tool that both ensures that these taxes are paid and potentially punishes, including criminally, those who do not meet their obligations. If you have employees, they cannot be held personally responsible, since they are not the ones who are obligated to deduct the taxes. Instead, the consequences fall upon you as a business owner.
There is a provision in the Internal Revenue Code that gives the IRS collection and enforcement powers when it comes to payroll taxes. 26 USC 6672 is a statute that provides for a direct penalty for any person who is legally responsible for collecting a tax under federal law but fails to do so. The law applies to instances in which there is a willful failure to collect or account for the tax. In other words, a simple mistake may not land you in trouble with the IRS personally.
The IRS will look to the facts and circumstances of the situation in determining whether to impose a personal penalty on an individual. They will determine whether the failure to pay the taxes was negligent or willful in nature. For example, if the agency finds that a corporate officer was using funds that were supposed to pay trust fund taxes for their own personal use, it could be considered willful. Further, ignoring multiple notices from the IRS informing a business that they have not paid trust fund taxes could also be a sign of deliberate action.
The penalties under this law can be steep. The law states that the penalty can equal the amount of the tax that was evaded. There are a number of exceptions and requirements that apply before the IRS can impose this penalty on an individual.
The IRS may also refer a business owner to the Criminal Investigations division for criminal prosecution, for failure to collect and pay over to the IRS payroll taxes.
Who May Be Punished for Failure to Pay Trust Fund Taxes?
There are numerous people who are working at a company who could be held legally responsible for the failure to pay trust fund taxes. Almost certainly, the IRS would go after employees who had the responsibility to pay and were involved in any actions to evade taxes. Generally, the IRS would take action against people who were in some sort of position of control. These individuals could include:
- Owners of a company
- Directors or officers
- Partners
- Chief financial officers
The IRS could penalize people on a more individual level, based on their level of responsibility in a company. For example, the agency could target an employee who had the ability to sign checks to pay the taxes. The IRS could also seek to penalize anyone who had knowledge of a scheme to avoid paying trust fund taxes.
When an individual owes money to the IRS, the agency can take a very aggressive posture in enforcing a debt. The IRS could even seize the personal bank accounts of those who owe money, or take steps to garnish their wages, as well as prosecute the erring business owner.
There may be ways that you can defend against IRS allegations that you were personally responsible for the failure to pay trust fund taxes that can include:
- The failure to pay these taxes was a mistake
- You were not a control person who had any part in the failure to pay taxes
- You were relying on the advice of an accountant
It is essential that you present your strongest possible defenses because there are significant financial consequences for a failure to pay these taxes. A tax attorney can engage with the IRS on your behalf and work to avoid this civil penalty.
Contact a New York Tax Attorney Today
You can avoid payroll tax problems in the first place, or get help from an experienced advocate when you do have issues, by speaking with a New York tax attorney at Thorgood Law Firm. We can either help you work with the IRS to resolve these issues and perhaps avoid personal liability when you do have a problem. Schedule a free initial consultation with a tax lawyer by filling out an online contact form or by calling us at (212) 490-0704.
