When some companies have a cash flow problem, what have they done? Some have thought that the cash flow problem was temporary due to a customer failing to remit payment when promised, an unexpected vendor bill, and a host of other situations. So management decides not to remit its federal payroll tax deposits to the IRS and uses the payroll taxes as working capital to fund the business operations. After all, the employer tells himself that he fully expects to remit the full amount due with the next payroll filing. What is the harm?
In the real world, what often happens is that the temporary problem does not immediately go away, and the employer again fails to remit the payroll taxes. As the balance of unpaid taxes continues to mount, so do the penalties for failure to remit the taxes due. After a while, the employer finds that the employment tax liabilities have quickly grown beyond the employer’s ability to satisfy its obligations. Eventually the case is assigned to IRS collection personnel. The IRS can impose the Trust Fund Recovery Penalty (TFRP) for willful failure to collect, account for, or pay over employment taxes. The TFRP can be imposed on any individual who is responsible for collecting or paying employment taxes and who willfully fails to collect or pay them. This means that the IRS will not only go after the company to collect the taxes due (plus interest and penalties), but also against every person that the IRS deems responsible for the remittance of the taxes. When the IRS defines “responsible persons”, it takes a very broad approach. Every officer and even a bookkeeper could find themselves receiving an IRS collection notice. Those individuals who receive these collection notices have the burden of proof to demonstrate that they were in fact not responsible for the payroll remittances to the IRS.
Having been criticized by the Taxpayer Advocate Office for its lax payroll tax collection procedures, the IRS has a new initiative (IR-2015-136). This “Early Interaction Initiative” is intended to help employers stay in compliance with their payment and reporting obligations. The IRS’s general approach to tax collection, including payroll tax collection, is focused on voluntary compliance. In the past, the first attempt by the IRS to contact troubled employers was often made after the employment tax return was filed. The new initiative aims to advance the time of first contact to avoid the rapid accumulation of unpaid payroll taxes.
To help employers avoid these problems, the initiative will monitor deposit patterns and identify employers whose payments decline or are late. The IRS will contact these employers by letter asking the employer to discuss the situation with the agency. Some employers may receive automated phone messages from the IRS providing information and assistance. In other situations, an IRS revenue officer may contact some of these employers at their place of business.
Employers who use payroll taxes as a temporary source of funding its operations usually wind up with a long-term problem that is very costly in terms of time, interest and penalties, and stress.
If you know of someone who has IRS tax problems and would like a free consultation with an experienced IRS tax resolution specialist, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.