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IRS Tax Compliance Resolve Your Payroll Tax Debt Before It's Too Late
More than 22 million taxpayers in the US have either failed to file a tax return or are behind in paying their IRS and state taxes due Before the pandemic hit!
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Source: Tax Rep Network LLC
There's increased enforcement in the payroll tax space. Like any operation, cash flow pays the bills. From the standpoint of revenue, payroll taxes collected by employers and remitted to the U.S. Government account for more than 60% of revenue collected in 2015. Payroll tax deposits or "trust funds" are a significant portion of federal revenue. Failure to report and deposit payroll taxes has an adverse cumulative effect that creates a huge gap in Treasury's ability to pay its bills. Collection efforts are most aggressive because the IRS has to payout 1040 refunds and credit your employees for their social security wages even though employer tax deposits were not made. Internal Revenue Code section 6672 provides an arsenal of tools that the IRS can use to inflict excruciating financial pain on entities, its owners, and other individuals who had the authority to collect and remit payroll taxes but knowingly failed to do so. the
Failure To Make Payroll Tax Deposits Puts You, Your Business, and Others at Serious Financial Risk
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We are in challenging times and no one feels the heat more than private business owners and the self-employed. You juggle making payroll with shrinking capacity. The numbers don't add up. An easy fix is to reassign funds to more important areas that keep the business afloat. Forking over cash withheld from your employees' gross pay to the IRS is voluntary right? You've missed a deposit or two before with no major crisis. "I'll catch up later when things get back on track" you rationalize. In this moment in time, the survival of everything that you've worked so hard to achieve is all that's top of mind. It's complicated right? These thought processes are both familiar and self-defeating. As a professional tax advisor I must warn you that danger lurks on the horizon for you, your business, and anyone else in your organization with signature authority and access to your payroll bank account. Failure to report and deposit payroll taxes is a criminal offense.
What are the risk factors for an employer who consistently fails to account for and deposit payroll taxes? From the perspective of the Department of Justice, failure to deposit, and failure to pay payroll taxes is theft and is classified as criminal activity. The same can be said about your state's Department of Revenue. To be clear, IRC section 6672 authorizes the IRS to recover trust funds from "any person required to collect, truthfully account for and pay over any tax imposed" and "who willfully fails to collect such tax or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof." The operative word is willful failure to abide by tax law. When you or your staff intentionally use trust funds to cover operating expenses or when owners repurpose trust funds for lifestyle enhancements (boats, planes, cars, etc...), be aware that you are engaged in criminal activity in the eyes of the DOJ. The consequences can destroy all that you've built for yourself and for your loved ones. Financial pain is almost certain for employers who fail to deposit properly. First, the company is assessed for
You will see increased enforcement in the payroll tax space. It's a huge revenue stream that empowers the IRS to pursue other sources or "guarantors" against whom it can initiate collection action. An IRS Letter 1153 has triggered anxiety and many sleepless nights for employers who find themselves in its cross hairs. Tread lightly with federal tax deposits. Getting behind is hard to overcome and it's not just owners who are subject to receiving dreaded IRS Letter 1153.
The chart below indicates that civil penalties assessed for failure to deposit employment taxes generated the most revenue for the Treasury with failure to pay employment taxes coming in at #2. The penalty for mishandling trust funds is 100% of the taxes that should have been withheld. Before using trust funds for short-term lending, add these financing costs into your repayment scenario: 100% penalty equal to payroll taxes owed but not deposited, plus: Failure to File Form(s) 941/940 : 5% /mo. (max 25%) Failure to Pay: 0.5% / mo. (max 25%) Failure to Deposit: Based on number of days late 2% : 1-5 days late 5% : 6-15 days late 10% : 16+ days late 10% : $$ not deposited but paid direct to IRS 15% : $$ still owed after receiving IRS notice 2% : of check amount that was not honored ($1250 or more) Businesses fail and owners go bankrupt under the weight of the accumulated liability. It's easy to miscalculate the real costs imposed on employers who fail to deposit payroll taxes properly. It's never worth it.
payroll taxes not deposited, plus interest and penalties that accrue monthly until paid in full. If the company can't pay the assessment, then collection actions proceed against the entity for the employer's portion of FICA taxes and FUTA (unemployment tax). After 60 days the IRS can initiate collection actions against individuals it deems to be responsible parties for trust fund taxes (aka owners and other individuals associated with your organization)..
Failed to deposit
It could very well be. Are you now or ever involved in the company's finances? Are you now or ever authorized to pay some creditors before others? If the answer to both questions is yes then you may be held liable for unpaid payroll taxes. Examples of responsible person(s) subject to IRS Trust Fund Recovery Penalty assessment (Letter 1153) are: Owners Partners Members/shareholders/directors/board members Bookkeepers Lenders/creditors Accounting firms/Payroll Service Providers (PSP) Parent companies Acquiring companies An employee's job title on its face does not automatically suggest a payroll tax responsibility. A better question is did he/she have bank signature authority? Employees who do not have signature authority over the account to which trust funds are deposited and from which payroll taxes are paid are generally not held liable for unpaid taxes; specifically if the ability to confirm that payroll taxes are paid is outside the scope of his or her job function. There are exceptions. We strongly suggest to our clients to reconstruct documents on a best-efforts basis and onboard them into a streamlined virtual ecosystem that speeds up the process and increases our chances of resolving payroll tax matters in their favor. The Appendix has case illustrations that demonstrate how these tax matters play themselves out in the real world.
Under authority of IRC section 6672, the IRS can recover trust funds withheld by employers from "any person required to collect, truthfully account for, and pay over any tax imposed" and "who willfully attempts in any manner to evade or defeat any such tax or the payment thereof." Two elements must be present if penalty and interest will accrue to your company and key individuals within it: Required to collect, account for and remit payroll taxes Willful failure to do so Willful is defined as an act performed with both knowledge and intention regarding trust funds withheld from gross wages for employees' share of FICA (currently 6.2% - Social Security and 1.45% - Medicare) in trust for the U.S. Government. Anyone who is aware, or should be aware, that trust funds were collected, were not deposited as required by law, and is aware that and/or knowingly misuses trust funds for other purposes is a responsible party. Period. There are numerous defenses raised by employers and third parties; but most have failed. Tax courts have consistently held responsible any individual(s) with deep pockets who had sufficient control over payroll processes yet did not make timely deposits. The final decision maker is not the only individual against whom the IRS can snare in this trap.
THE LETTER IS IN THE MAIL
Required to collect
IRS Letter 1153: Whose At Risk of Being Assessed Trust Fund Recovery Penalties?
You've worked hard for your success and for a lifestyle that rewards you handsomely. To risk your personal finances, relationships, and health now is counterproductive. There are solutions for nearly every tax matter when you know where to get help. Payroll taxes are complicated. A company whose annual gross revenue falls between $500,000 and $5 million dollars; and that employs 10-50 employees, can expect payroll responsibilities and penalties for noncompliance to skyrocket in tandem. So what are your options when you can't pay the assessment at the entity or individual levels? My first recommendation is to protect your assets. There are specific procedures that you must follow. Engage a tax resolution specialist when tax liabilities are $50,000 or more. Anyone deemed responsible is joint and severally liable and professional help can soften the blow. If your pockets are deep, then there is nothing in the Internal Revenue Code that requires the IRS to pursue the company first and not you. When an assessment is issued, you have 60 days to file a protest. Open all IRS letters and notices. It's a fool's errand to ignore them. Interest accrues monthly until the liability is resolved. Know where you stand with the IRS at all times. Representation by a professional qualified to practice before the IRS is in your financial best interest if you fall into this category.
So What Happens When You're Deemed a Responsible Person But Can't Pay The Trust Fund Recovery Penalty (TFRP)?
The next step after a proposed assessment is for the IRS to request interviews from owner/employees. Better known as the 4180 Interview, you will receive IRS Form 4180 by mail. I strongly advise against completing it before contacting an Enrolled Agent, CPA, or tax attorney for professional assistance. The questions are broad and wrong answers can be used against you. Ignorance of tax law is not a viable defense. Rather than protest the assessment, you can accept it as being correct and waive your right to protest. You must sign IRS Form 2751 to waive your rights and to allow the IRS to automatically finalize its assessment against you. Rarely does this action result in an outcome that is in your best financial interest. Professional advice is strongly recommended before considering this option. If you miss the 60-day deadline to protest the assessment, then you or your representative can file an Offer in Compromise, Doubt as to Liability (DATL) with an explanation for your failure to respond and supporting evidence. A voluntary installment agreement executed between the individual (not the company) and the IRS may also work. If you absolutely cannot pay then dissolve the company. Consult a competent tax advisor to explore all options available to you first.
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Know where you are in the IRS collection process before seeking help. The IRS will contact you by certified mail during the collection process. You must exercise your taxpayer rights within specific deadlines. IRS notices are issued based on the following schedule: 60-days for taxpayer to protest Letter 1153 Billing Notice: 2 weeks after assessment is final Threat to Levy: 30-45 days after billing notice Final Notice of Levy: 30-45 days after Threat to Levy. Levy assets: 45 days after Final Notice
Compliance is Golden!
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The IRS has 10 years to collect delinquent taxes once an assessment becomes final. Trust Fund liabilities are seldom discharged in bankruptcy. Criminal prosecution for payroll tax violations is a top priority for the IRS and for the DOJ. IRC section 3505 creates a separate liability for third parties who lend money to an entity to pay its workers. That's right...if dad makes you a loan to pay your employees then dad is considered to be a third-party lender and can be held liable for your unpaid payroll taxes. The liability is limited to the lesser of the trust fund liability or 25% of the loan amount. It's a civil offense that the IRS can use at will. You wouldn't be running a business if you didn't have the smarts to do so. It's hard work. Financial uncertainty is a burden that will eat away at you for the next 10 years. Why risk it when a workable resolution can bring you lasting peace of mind. If you get a Letter 1153, take the next 60 days to work through the matter with a tax professional who understands the issues and who can guide you through this daunting process. If your tax liability is $25,000 or less, then you can make a small case request on your own rather than file a formal written protest (see IRS Publication 5). If your tax liability is $50,000 or more, then guidance from a tax pro with credentials to practice before the IRS is strongly recommended. You will need to execute an IRS Form 2858 to authorize your EA, CPA, or tax attorney to represent you. Employment tax laws are extremely complex. You must build a rock-solid case in order to successfully mitigate your financial risk.
Before you approach the IRS with a potential solution to your payroll tax matter, your entity must first get complaint with tax laws. Compliance is the foundation upon which your tax case is built. Without entity and personal compliance, no one can start the process of reaching a workable resolution with the IRS. The IRS is not required to work with an entity that is non-compliant and can force operations to shut down permanently! What does entity compliance look like? Last 6 years of business tax returns have been filed and liabilities addressed Current year's quarterly tax returns are filed and payroll deposits made (Form 941) Current quarter's payroll tax deposits have been made Prior year's Employer's Annual Federal Unemployment (FUTA) tax return has been filed (Form 940) Owners must not only "get" compliant, but must also "stay" compliant in order for a negotiated settlement to remain in force with the IRS. If your entity repeatedly incurs payroll tax debt year after year (pyramiding), then criminal charges may also be filed. It's that big of a deal to the IRS. To stay compliant, you need a long-term strategy that systemically keeps you compliant with employment tax laws for years to come and that monitors your IRS accounts for red flags.
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Real-life scenarios
Following are examples of actual cases that appeared before the tax court. Purcell vs. United States. 1 F.3d 932 (9th Cir. 1993). The issue in this case was whether or not a corporate officer is personally liable when the company fails to remit federal withholding taxes to the IRS. The corporate officer, Joseph Purcell, was president and sole shareholder; his defense was that he delegated all financial matters to the company's chief financial officer Lester Hatchard. Therefore, he should be exempt from personal responsibility. It turns out that Purcell delegated financial matters to a CFO who embezzled over $450,000 by writing bogus company checks to himself. He was found out and resigned. Purcell reassumed control over company financial affairs. In so doing, he discovered that Hatchard neither filed federal employment tax returns for the first two quarters of the tax year, nor did he remit withheld taxes to the IRS. Purcell contacted the IRS and held several meetings about the tax matter. He filed the proper returns going forward to get into compliance; however, not all of the payroll taxes withheld were paid over. To try and stop the bleeding, the company filed for bankruptcy protection. Two years later, the IRS assessed Purcell personally for taxes that Hatcher failed to pay. Purcell filed suit in federal district court seeking relief. The United States filed a counterclaim. Purcell lost and appealed to the 9th Circuit Court of Appeals. The appeals court upheld the lower court's decision. Mr. Purcell was a responsible person under Internal Revenue Code section 6672. As the sole shareholder, he had authority to exercise significant control over the company's finances. The fact that he delegated the matter to someone else was irrelevant. Withholding taxes are required to be turned over to the IRS and Purcell was responsible for making sure that the obligation was met. He failed to do so. What sealed his fate is the fact that after he took back financial control of the company, he became aware that Hatcher failed to remit payroll taxes and intentionally used corporate funds to pay creditors other than the United States.
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