IRS Payroll Tax Problems & Trust Fund Tax Problems
If you own a business you should be paying attention to payroll taxes and trust fund taxes unless you want the IRS to be your worst nightmare and cause you many sleepless nights with accruing tax liabilities.
Trust fund taxes are the federal and state withholding amounts withheld from your employees’ paychecks. The reason they are called trust fund taxes is because the business is supposed to hold the funds “in trust” for prompt reporting and payment to the IRS and state government.
Two of the most common ways business owners end up in trouble with trust fund tax delinquencies are they experience cash flow problems and an economic downturn. Regardless, responsibilities remain. Employees want to be paid, suppliers and vendors insist on payment or they won’t ship or fulfill orders and the bank and lenders insist on their payments every 30 days. The only ones not hassling you initially is the IRS. You intend to pay it when the big check for this job comes in and all will be well. Then, something happens and the company doesn’t receive the big check. You then miss a payment and it doesn’t take long until the IRS notice or agents come knocking.
Another common scenario is you hired a bookkeeper or an employee of the company that is responsible for filing the quarterly return and making the proper tax payments. However, one day your employee doesn’t come to work and it is discovered they have been embezzling the trust funds rather than forwarding them to the IRS. This does not necessarily excuse you as the business owner from the obligation to pay IRS the trust fund taxes and the interest and penalties.
Because the IRS views trust fund taxes as their money they view unpaid trust fund taxes as embezzled funds and they will aggressively seek to collect their money. Having an incorporated business or filing bankruptcy will not resolve the problem because trust fund taxes are not dischargeable in bankruptcy. If left unpaid the business trust fund taxes will eventually be assessed personally against the responsible parties. This is the person or persons who the IRS determines has the status, duty and control over the finances. Because in these scenarios you are not innocent until proven guilty, you have the burden of proof that you are NOT the Responsible Party. The IRS can deem more than one person a Responsible Party and can collect from all of them at the same time. However, they cannot over-collect unpaid liability. The term Responsible Party is not a defined term that may be easy to disprove but is a factual inquiry decided on a case-by-case basis.
Top Ten Fraud Warning Signs of Problem Employees
- Double talk or inconsistencies
- Violent temper or other unpleasant behavior
- Expensive habits
- Having or spending more than earnings could support
- Never takes time off
- In transition-marriage, divorce, children
- Money problems
- An abnormal fear of or antagonism toward security or management personnel
Key To Detection Of Fraud
Trust your gut. Even if a signal of fraud seems too obvious to actually be fraud, don’t ignore it.
- Too often, signals pointing to internal theft, even when noticed, are mistakenly ascribed to chance, error, coincidence, or some other benign circumstance…and the signals are ignored.
- A thief, like a magician, depends upon your misinterpreting the obvious…or upon his or her ability to confuse you. Don’t be deceived, distracted or misled.
Ways To Prevent Fraud
Preventing fraud is well worth your effort because the work you invest will be less work than dealing with fraud after the fact. Here are some prevention techniques:
- Have checks and balance measures in place internally.
- Hire an outside firm to audit your books annually.
- As the business owner, always confirm the returns are filed and trust fund taxes are paid quarterly.
If you find yourself in the middle of a mess like these described above, employing an experienced tax attorney and CPA can be invaluable. Atlanta tax attorney and CPA Jeffrey S. Gartzman is a consummate professional with over 35 years of experience representing businesses and individuals facing challenging and complex legal and tax issues.
Squaring off against the IRS regarding unpaid payroll taxes or trust fund taxes without skilled tax representation is a surefire way to risk not only incurring severe financial penalties but also possibly even losing your business altogether. Call us in Atlanta at 770-939-7710. You can also email us to request an appointment.