Unpaid payroll taxes have become more dangerous for landlords
Payroll taxes collected by employers on employee paychecks and remitted to the government account for more than 70% of all taxes collected. Therefore, the collection of payroll taxes is essential to the government’s ability to function. It’s no surprise, then, that the IRS and the Department of Justice have made payroll tax enforcement a priority. Still, payroll taxes are probably the biggest reason small businesses have tax problems.
At the same time, the share of employee social charges, i.e. the salaries of workers, can easily be taken by the employer to finance the company in difficult times. In other words, money withheld from employees is easy for the employer to take, but difficult for the employer to repay. Easy to take because there is no banker to say “no” and no paperwork to fill out: just keep the money and spend it.
Payroll tax debt, however, is the most difficult to repay due to the variety of penalties and interest that accrue on these amounts owed. And often the pay periods where the company is late follow one another, so that by the time the IRS catches the problem and reveals that the liabilities have accumulated to such an extent that the company will never be able to repay the debt in full.
So far, the IRS and DOJ have pursued unpaid payroll charges through civil action against the company and by assessing those responsible for the unpaid portion of taxes withheld from the employee’s paycheck, referred to as a trust fund recovery penalty under Section 6672. The employer would be assigned a revenue officer from the IRS Collections Division who would investigate the trust fund to determine the amount actually owed and who was responsible for non-payment of social charges by the employer. This revenue officer would propose the valuations of the trust fund against the responsible owner and/or key employees.
In addition to the personal assessment of the trust fund recovery penalty, the IRS could also seek an injunction against the employer to have the requirement to file and file on time be ordered by the court. This makes any violation in the future a violation of the court order, making it easier to shut down the offending employer.
A notice of federal tax lien would be filed, and in cases where it appeared that the failure to account for and pay payroll taxes was intentional, the IRS could pursue the matter criminally. Criminal offenses are referred to the DOJ for prosecution under Section 7201, Section 7202, or both. The DOJ could also see court orders against recalcitrant owners to ensure they reported and filed correctly or they would be shut down.
The IRS has now upped the ante for employers who are late.
Starting in June, the IRS has made it clear that its tax officials will now trace where unpaid payroll tax money actually went during their “trust fund investigation.” If it is determined that the money went to the owner or was spent for the benefit of the owner, the owner will now face a double whammy of unpaid income taxes on those funds. In other words, if a business owner is pocketing payroll taxes to maintain a luxurious lifestyle, it is more likely to result in lawsuits.
For employers where payroll tax money was not paid to the government, but was paid or used for the benefit of the owner, revenue officers are responsible for pulling the owner’s 1040 tax returns to see if the money that benefited them was declared as income. If the money was not recovered as income on the personal income tax return, the revenue officer will submit the returns and investigative records to the Civil Audit Division for tax assessment and the 75% civil fraud penalty or, if significant enough, simply refer the matter to the IRS Criminal Investigations Division for review for criminal prosecution.
This means for business owners and their tax professionals that a seemingly routine tax debt could turn a civil liability into a pending criminal tax nightmare. Tax professionals should advise their client that it is essential to review where the payroll taxes went and, if used or paid to the owner, the preemptive modification of tax returns should be done before the IRS takes action. shows up.
Naturally, the client business owner will not like this. But the potential fallout from not doing so can be much worse.
This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Eric Green is a managing partner of Green & Sklarz LLC, where he focuses his practice on the civil and criminal representation of taxpayers. He is also the founder of Tax Rep Network, where he trains accountants and attorneys on building their IRS representation practices.
We would love to hear your smart and original point of view: Write for us.