This week (so far) has been about payroll taxes around our office. Clients come to us from all over the U.S. with payroll tax horror stories. So here are some ground rules and insights into the topic.
First, using withheld payroll taxes for other purposes besides paying the tax can be a dangerous and very expensive game. You must AVOID THE PAYROLL TAX TRAP.
- An employer becomes a trustee for the U.S. government when it distributes payroll checks to the employees. Yowch! Say that again? You’re working for the feds if you issue paychecks. This is because withheld payroll taxes are called “trust fund taxes” and, in the eyes of the IRS, belong to the government and not to you. Companies should never use these funds to pay salaries, business expenses, or for any other purpose.
- When an employer fails to pay its withheld payroll taxes to the government, IRC section 6672(a) imposes a penalty equal to the entire amount of trust fund taxes on every “responsible person” who “willfully” fails to see that the taxes are paid. The IRS may assess the penalty against a responsible person without first trying to collect the penalty even from the employer! So, corporate officer/board member beware!
- The process. After the IRS introduces proof in court that the penalty applies, the taxpayer has the burden of proving he or she is NOT a responsible person or that there was no willful payment of other creditors while payroll taxes went unpaid or were delinquent. Your tax lawyer will be required to put together testimony and other evidence that you are NOT a responsible person. A responsible person can avoid a charge of willfulness by taking all reasonable efforts to see that the taxes are paid.
- If a trust fund recovery penalty is assessed, the taxpayer (you) can file a tax appeal, ask for a collection due process hearing, submit an offer in compromise, pay a representative penalty, file suit, seek reimbursement from other responsible persons or arrange to pay the assessment in installments.
- If you find yourself in the hot seat with payroll taxes, do not delay in contacting John Ellsworth and getting the help you will need.