This is the second in a series of articles on the topic of payroll taxes.
If you prefer a video format, click here to watch our YouTube video on resolving payroll tax problems.
Businesses hold Trust Fund Taxes on behalf of the government. Trust Fund Taxes include payroll taxes withheld by the employer from the wages of employees.
Trust Fund Recovery Penalty
The IRS imposes a Trust Fund Recovery Penalty when a business fails to submit Trust Fund Taxes. The penalty is 100% of the tax. The imposition of the penalty is mandatory. The amount of the tax does not matter.
The IRS will impose the Trust Fund Recovery Penalty on anyone who willfully misuses payroll taxes. In addition, they must also be a “responsible party.” The IRS has the power to levy bank accounts, IRA’s and other assets from responsible parties in order to collect the penalty. Responsible parties have joint and several liability for the penalty. In other words, the IRS may collect the penalty from any and all responsible parties. There is no requirement for the IRS to collect from the employer first.
Who is a Responsible Party?
The IRS and the courts define “responsible party” broadly. The term includes owners, partners, bookkeepers, and key employees. In addition, accounting firms, parent companies, and purchasing companies may be responsible parties as well. In the case of nonprofit organizations, the IRS may consider charitable volunteers to be held liable for the Trust Fund Recovery Penalty if they are responsible parties.
For this purpose, responsibility is primarily the ability to decide who gets paid. Signature authority over the bank account is the primary proof. Above all, it is critically important to restrict signature authority over the bank account whenever possible.
Processing payroll without signature authority over the bank account is considered an administrative function. It is not indicative of responsibility for the purposes of this test.
Consider these strategies when dealing with the IRS on Trust Fund Taxes:
- Obtain copies of the IRS interview Form 4180. This shows what individuals said regarding the responsibilities of key employees.
- Get copies of canceled checks and bank signature cards to identify signature authority.
- Interview former employees regarding responsibilities. Obtain affidavits with the assistance of an attorney.
- Consider closing the business if it is no longer viable. This reduces the total tax liability to the Trust Fund portion. The owners may be eligible for an Offer in Compromise for their share of the penalty.
In conclusion, it is important to note that the IRS is aggressively pursuing criminal employment tax cases. Repeated misuse of payroll taxes suggests criminal activity. Likewise, lavish lifestyles, expenses homes, boats, planes, and exotic cars will often be held against the responsible party if the case goes to trial.
For more information on the topic of the Trust Fund Recovery Penalty and resolving payroll tax issues, please see our YouTube video on the topic. Click here for the link to the video.
For more general information, click here for our introductory article on payroll taxes. This too is available in video format. Click here for the introductory video.
Founded by Gary Massey, CPA, Massey and Company is a boutique CPA firm in located in Atlanta, Georgia serving the needs of small businesses and their owners.