Payroll Taxes are owed The IRS…..Leave Them Alone
If your company collects payroll taxes from employees, heed this warning: Regardless of what your financial situation is do not borrow from the tax withholding fund. The IRS will crack down hard on you if the money is not there when due. I have worked with clients who have fallen behind on paying payroll taxes and in two cases the amounts were sizable. In one instance the company ended up declaring bankruptcy and in the other the company had to seek the help of a tax service who specialized in handling tax workouts. Both of these situations not only cost the business owner back taxes, but additional fees for the outside legal counsel and tax advice.
There are times when businesses face a cash shortfall. While it may be tempting to look at tax money owed as an easy fix to the shortfall, “I’ll send it later you say”. However, when it comes to bad ideas, this is one of the worst.
If the money is not sent when the due date arrives…..the IRS will take action against the responsible parties. “That money belongs to employees and is meant to be held in a trust fund until deposited to pay income tax, Social Security and Medicare taxes.”
Assuming that the corporate veil will protect you or other corporate officers is a misnomer. The one area where you cannot escape personal liability is payroll taxes.
Let’s take as an example a business, which has five corporate officers, falls short in paying taxes by $100,000. One decision the IRS must make is who willfully failed to make the payments. However, the IRS will go after the party who is the easiest to collect from. You may not have any knowledge that the tax payments were not made, but if it turns out your four partners flee, you may be held responsible for the entire amount.
Did you know the IRS can attach your business bank accounts and assets if there is not enough money to pay the bill. The IRS can even shut your business down, seize your assets and auction them off to satisfy the shortfall.
Pretty bad news, right? There’s more.
How hard will the IRS be? The fine used to be called the 100 Percent Penalty until the IRS changed the name calling it “The Trust Fund Recovery Penalty”. An officer or other responsible employee can personally be assessed 100 percent of the amount and that amount does not include interest.
How hard is it for the IRS to impose the penalty? The IRS has to prove that you willfully failed to pay the withholding taxes. “In one case, the Court ruled that willfulness was evident simply because the taxpayer made payments to other creditors ahead of the IRS.” (Edward J. Loew, 2002-1 USTC 50, 126; U.S. Court of Appears, 9th Circuit)
Will a tax violation lead to prison? Not usually. However; should a pattern of violations emerge, the IRS can launch a criminal investigation, which could lead to prison.
The repercussions can be far reaching beyond the company. Legal precedents have been set which allow the IRS to collect from banks and financial institutions that lend you money to pay the taxes. In addition, the IRS can go after partners and other corporate executives even though they were not active in running the company.
For a small to mid-sized business, it is a very good idea to enlist the services of an outside service payroll service to handle the payroll function. Payroll providers relieve you of the burden of having to make tax payments and handling recordkeeping. Don’t be lulled into thinking that the payroll function is autopilot payroll needs regular monitoring. If a shortfall does occur, your company and not the payroll provider will bear the responsibility.