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IRS Business Delinquent Payroll Taxes|Consequences

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IRS Business Delinquent Payroll Taxes|Consequences

IRS Business Delinquent Payroll Taxes Consequences

Being a small business owner is both an exhilarating and frightening experience. Few business owners truly understand what they are getting themselves into when they start their business. With the freedom, comes responsibility.  This is especially true when it comes to payroll tax obligations. 

As part of our ongoing Profit Maximization Coaching Program, I council new business owners, providing them with the proper tools to start their business.  I almost never suggest to a new business owner that they perform their own payroll function.  The rules regarding business payroll are incredibly complex.  The penalties for a business’ failure to properly administer payroll are HUGE.  I tell new business owners, they will remember the penalty notice that they received for being even ONE DAY LATE for a federal tax deposit, for a very long time.  It will get your attention and you will never want to do it again.   Even if you are the only employee and you are late, the PENALTIES ARE HUGE.

It’s imperative to know the consequences of being Delinquent on Business Payroll Taxes Liabilities. When you neglect to pay Business Payroll Taxes on time you will receive a warning from the IRS. If the issue is not resolved in a timely manner (10 days), there are several consequences that can become reality and could potentially devastate your business:

  • The IRS imposes a very harsh Penalty when Business Payroll Taxes are not paid. The penalty is 100% of the employee portion of the taxes owed. This is called the “Trust Fund Recovery Penalty.” Remember, when you have payroll and collect taxes from your employees, you are acting a trustee of those funds. By not paying over those funds to the IRS you are breaking your binding trustee agreement with the United States Government.
  • IRC Section 6672(a) states that the penalty for not paying Business Payroll Taxes may be assessed against “each responsible person” who willfully neglects to pay the payroll taxes. A responsible person is any person who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage or direct the entity and the disposition of its funds and assets. The ability to fund the entity or the entitlement to the property of the entity alone, however, without any corresponding authority to control, manage, or direct the entity, does not cause the individual to be a responsible party  This means Accountants, Bookkeepers, Office Managers, and anyone with check signing ability can be held responsible for the payroll tax debt.

Even if there was no bad motive involved, the “Trust Fund Recovery” Penalty may be imposed. When imposed it is imposed equally against ALL responsible persons.  Do they at times over-collect? You best they do!.  Here is the really life scenario that we resent had.  Owner fails to pay payroll taxes for a period of almost 6 months on a rather large payroll, because the business was struggling.  The Office Manager who was responsible for writing checks noticed payroll obligations had not been paid for some time, brought it to the attention of the owner, yet continued to pay the normal bills.  She was told by the owner that he was taking care of it from personal funds.  As you might guess, he was not.  The business eventually failed, still owing payroll liabilities.  As part of the collection process, the IRS starts interviewing responsible persons which includes the Office Manager.  Post performing the Form 4180 interviews, the IRS assesses all responsible parties with 1.2 million dollars in Trust Fund Recovery Penalty, including our new client, the Office Manager.  The Office Manager of course feels this is unfair, she was not an owner and felt she was not responsible for the obligation.   Because of her position and responsibilities, she was ruled by the IRS as a “responsible person” Long story short, the IRS must prove that a responsible person is “willful”.  Willful means that the responsible person chose to pay other creditors instead of the IRS, even though the individual knew, or recklessly disregarded, that the business was not paying the taxes. Willfulness does not require evil intent or bad faith.   Although not easy, through affidavits from other employees that were witness to the discussions that the Office Manager had with the owner, we were able to prove that the Office Manager was not “willful” Needless to say she was ecstatic.  Had things gone differently, she could have been held responsible for 1.2 million dollars in payroll obligations for a business that she did not own.

If you are facing this issue or soon will be, contact competent representation NOW, especially before the Form 4180 “responsible Party” hearing.  Your case becomes more difficult once labeled a “Responsible Party.  Look above for a discussion about who may be labeled a responsible party.

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