If you own and operate a business that collects payroll taxes from employees, beware: Regardless of what your corporate financial situation is, do not borrow from the withholding tax fund. If the money is not there when it’s due, Uncle Sam will crack down hard. All businesses face downturns when cash flows dry up. It may be tempting to look at payroll tax money as an easy fix to a cash crunch. “I’ll send it later,” you may think. But when it comes to bad ideas, this is the worst one.
How Hard Will an IRS Crackdown Be?
The fine used to be named the “100% Penalty” until the tax agency tried to soften its image by renaming it “Trust Fund Recovery Penalty.” But the result is the same: An officer, business owner or any other responsible employee can personally be assessed as much as 100% of the amount. In addition, it does not include interest.
How Hard Is it for the IRS to Impose the Penalty?
The IRS has to prove that you “willfully” failed to give back withheld taxes. In one case, the Court noted that willfulness was evident simply because the taxpayer made payments to other creditors ahead of the IRS. (Edward J. Loew, 2002-1 USTC 50,126; U.S. Court of Appeals, 9th Circuit)
If the due date for making payroll tax deposits arrives and the money is not sent … the IRS will take action against the responsible parties. That money belongs to your employees and is meant to be held in a trust fund until deposited to pay income tax, Medicare taxes, and Social Security.
Don’t assume the corporate veil will shield you or other corporate officers. Payroll taxes are one area where you cannot escape personal liability.
Suppose your business, which has five corporate officers, comes up $100,000 short in unpaid trust money. The IRS has to decide who willfully failed to make the payments. But often, the tax agency goes after the person who is the easiest to collect from. You may be unaware the tax deposits were not made. So if it turns out your four partners flee, you could be held responsible for the whole $100,000.
If there isn’t enough money to pay the bill, the IRS can attach your business bank accounts or assets. If there is still a shortfall, you may find your business shut down and your assets auctioned off or even seized.
Pretty bad news, right? There’s more. Even if your firm files for bankruptcy, the debt is not dischargeable.
Will the government send violators to jail? Not usually. But if the IRS sees a pattern of repeated violations, it can launch a criminal investigation, which could lead to imprisonment.
The repercussions can spread beyond the company. There are legal precedents that allow the IRS to collect from, say, financial institutions and banks that lend you money to pay those taxes. And the agency can go after partners and other corporate executives, even if they weren’t actively running the company.
The easiest way out of a payroll mess is to avoid getting into one in the first place. If you are involved in a small or medium-sized business, it can be a good idea to hire an outside service to handle payroll duties.
A good payroll service provider relieves you of an enormous burden by cutting the checks, making the deductions, handling recordkeeping, and taking care of the tax payments. But don’t be fooled into feeling like your payroll is on autopilot. Payroll needs regular monitoring. If a shortfall occurs, your company, not the payroll provider, will bear the ultimate responsibility.
Hoberman & Lesser’s NYC accountants serve a broad cross section of businesses, ranging from publicly held companies, to private sector businesses, to individual entrepreneurs throughout New York, New Jersey, and Connecticut, and across the United States. To schedule a complimentary and confidential consultation with a member of our team, please contact us.
