Payroll taxes are treated differently from other types of business debts. In other cases, the business owner is generally not held personally liable for the debts of their business, provided that they have chosen the proper form of incorporation. However, when payroll taxes are involved, the IRS treats a failure to withhold and pay far more seriously. The business owner can be personally liable for debts associated with unpaid payroll taxes.
Who may be held liable for TFRP? Each business owner and all responsible persons (officials of the business and all those IRS determines have significant control over the company’s finances and its payroll collecting activities) may be held liable for TFRP.
If you are a business owner (or an official with significant control over the company’s finances and its payroll collecting activities) and you have questions about payroll tax issues or if the IRS is claiming that you owe a substantial amount of money for TFRP, you need legal help from a New York tax attorney.
The IRS Assesses Significant Penalties for Willful Nonpayment of Payroll Taxes
Whenever an employee has earned payroll income, a corresponding payroll tax liability accrues and the employer is required to withhold the taxes from the employee’s paycheck. This rule is designed to ensure that the government is paid on time, and the employee does not need to worry about paying these payroll taxes on their own. The payroll taxes are required to be held and deposited into a trust account. The IRS takes prompt withholding and payment of these taxes very seriously.
The law allows the IRS to personally pursue any responsible person who willfully failed to collect, account for, or pay over trust fund taxes. Here, willfullness means the following two things:
- Knowing the taxes were due; and
- Choosing to pay other expenses instead
How the IRS Determines Whether a Penalty Is Warranted
You do not need to have an intent to defraud the IRS. All that needs to happen is that you must have made a conscious decision not to send the payroll taxes to the IRS when you knew that you had an obligation to pay. When the IRS is determining whether someone is personally liable for payroll taxes, there will be a two-step inquiry:
- The IRS will first determine whether the individual is a responsible person who had control over the situation. This control could be the ability to write checks and make financial decisions.
- The IRS will then review the facts and circumstances of your case to decide whether the failure to pay the payroll taxes was willful.
The liability for the unpaid taxes does not fall only on the business owner. Anyone who played a role in the failure to collect and pay over can be held personally responsible. Even payroll managers and accounting professionals can be held liable for these unpaid taxes.
What this means is that anyone who committed these actions may personally owe the IRS money. The IRS will not only assess the full amount of payroll taxes that are past due, but it will also add a penalty of 100% of the trust fund taxes, which effectively doubles the amount of money that is owed. You could end up owing the IRS a considerable amount of money.
The IRS will conduct an investigation if there are repeated or lingering payroll tax issues. If that happens, you will need the help of a New York tax lawyer. The IRS will likely request more information, and may even want to talk to employees and corporate officers, to determine whether any failure to pay the taxes was willful.
How the IRS Can Collect These Penalties
The IRS has a number of methods that it can use to collect any back taxes from an individual who is personally liable, including:
- Federal tax liens
- Bank levies and wage garnishment
- Asset seizure
As an individual, you may agree to an installment plan to pay the penalties and back taxes, or you could make an offer-in-compromise.
Defenses to IRS Payroll Tax Penalties
You have a number of defenses when the IRS is conducting its investigation. The most common defense is to claim that the failure to pay the taxes was an oversight and was not willful. If you are successful, you may not face a 100% penalty and personal liability. Other defenses that you may use include the following:
- You were not the party that was responsible for the failure to pay;
- You relied on the advice of a professional or a payroll service; or
- There are additional parties who should also be liable, and it should not fall on you alone.
Like any other type of adverse action, the IRS accords each taxpayer the right to appeal its decision. First, you are entitled to due process within the IRS itself to allow you to explain your side of the story. The IRS can hold an Appeals Conference, where you can administratively challenge the penalty within the agency. If you are not successful, you can pay a small part of the penalty and then sue the IRS for a refund in federal court.
How a Tax Attorney Can Help
A tax attorney provides crucial representation when the IRS assesses you personally liable for a company’s unpaid payroll taxes. These attorneys challenge the IRS’s determination that you were a “responsible person” with willful failure to pay, investigating whether you had actual authority over financial decisions and tax payments.
Your tax lawyer gathers evidence demonstrating you lacked control over company finances, were not responsible for tax compliance, or acted reasonably under the circumstances. They negotiate with IRS agents, presenting documentation that other individuals bore responsibility or that financial constraints prevented payment despite good faith efforts.
Attorneys challenge penalty assessments through administrative appeals and Tax Court litigation when necessary. They negotiate installment agreements or offers in compromise to resolve liabilities affordably, protecting your personal assets from IRS liens and levies while ensuring you are not held liable for penalties that should apply to others.
Contact a New York Tax Lawyer
If you have issues with the IRS relating to payroll taxes and you are facing personal liability, the New York tax attorneys at the Thorgood Law Firm can help. We can either work with the IRS or take your case to court. Schedule a free initial consultation with a tax lawyer by visiting our website or by calling us today at (212) 490-0704.
