Many businesses go through difficult economic periods. As a strategy to stay afloat, some small companies/individuals will resort to funding their cash flow needs by utilizing employee payroll tax withholding.
The IRS does not appreciate this method of financing. To show their displeasure, the agency will assess a ‘Trust Fund Recovery Penalty’ on the assets of the responsible parties, which are typically the owners and operators of the business, to collect the unpaid withholding taxes. It also penalizes those who had control over the decision to divert the payroll money from the IRS to other creditors of the business.
Trust Fund Taxes
There are three components of Trust Fund Taxes:
- Federal income tax withheld from employees’ wages
- Federal Social Security tax withheld from employees’ wages
- Medicare taxes withheld from employees’ wages
Combined, the 3 withholdings listed above are called “trust fund” taxes. If the taxes are not remitted to the Federal government in a timely fashion, then trouble will arise in the form of a ‘trust fund recovery penalty.’
The IRS Trust Fund Investigation
The IRS views trust fund taxes differently from most other back-tax matters. The fact is, those funds represent the employees’ fulfilled obligation to pay their taxes on income earned. It is the responsibility of the employer to withhold these funds “in trust”, and remit to the IRS. When these funds aren’t handed over to the agency, it’s basically viewed as ‘stealing’.
The investigation is conducted by an IRS Revenue Officer. Resembling a scene straight out of a CSI episode, the Revenue Officer tends to reel in as many people as possible for interviewing purposes, even those who are innocent. Their first objective is to determine who is in-charge of, and has the authority in deciding which creditors to pay, including the IRS.
The second objective of the Revenue Officer is to determine if the in-charge person acted “willfully” in not remitting the payroll taxes to the government.
Generally this involves the responsible person:
- knowing that the taxes are due and are owed
- choosing to pay other creditors instead of the IRS, such as employees or suppliers
Other aspects to the Revenue Officer’s investigating includes the examination of corporate records, bank documents, and other related documentation from the business, and any other relevant documentation in order to assign responsibility for the trust fund recovery penalty. If the business fails to provide the requested documentation, the IRS may serve a summons to the business, and possibly the business’s bank, or other relevant party for it.
Once a trust fund recovery penalty is assessed, the IRS has 10 years to collect it. The IRS issues a Notice of Federal Tax Lien against the assessed person. The IRS will begin seizing the assessed person’s wages and bank accounts, unless the assessed can negotiate a resolution with the IRS. BTW, a trust fund recovery penalty is not discharge-able in bankruptcy.
What To Do:
Although the IRS has many weapons, you also have rights too.
For starters, a taxpayer should politely decline an interview with a Revenue Officer until proper representation is obtained.
A Certified Tax Resolution Specialist (CTRS) or tax attorney with IRS tax negotiating experience can help you resolve your payroll tax problems, and keep your doors open for business. Solutions for your payroll tax problem may include:
- Submitting an Offer in Compromise to reduce your payroll tax debt
- Negotiating an Installment Payment Agreement, so that you can pay your payroll tax debt over as long as 10 years or more
- Reviewing your tax accounts to determine whether or not the IRS has correctly calculated your payroll taxes
- Negotiating releases of federal tax liens, so that you can obtain a loan to pay-off your taxes
- Obtaining releases of payroll tax levies
- Filing claims for interest and penalty abatement
Of course every case is different, and your available options will depend on your situation. If you find yourself in a predicament like this, get help fast.