On behalf of Lance Drury at The Law Firm of Lance R. Drury
An employer, business executive, director or other person with business responsibility may be assessed a civil penalty even where the person did not know of the duty to collect and pay employment taxes, if the IRS feels he or she should have known.
Especially for small business owners, it is easy to concentrate on making the day-to-day business successful and neglect other responsibilities. When business owners also become employers, it is important to get professional advice about employers’ legal responsibility to withhold certain federal taxes from employee wages, deposit them into approved financial institutions, pay the withhold monies to the IRS on time and file related returns.
Withholding taxes include federal income tax and those for Social Security and Medicare. The latter two are called FICA taxes (according to the Federal Insurance Contributions Act) and are met by employer matching funds.
Failure to do so will get the attention of the IRS and can result in civil and even criminal penalties. Sometimes the failure to pay is an oversight or a lack of understanding of what legal duties exist. A business may be so focused on the bottom line that the money that should be held in trust for the IRS from payroll withholding is instead used for other expenses. In tough times, an employer may think that it can take a short-term loan from withheld money to make ends meet with the intention of fast repayment, but it does not always work out that way.
Worse, sometimes employers actually decide to fraudulently underreport and underpay the amount of withheld tax due, a potential tax crime. According to the IRS, in FY 2016, the agency sentenced 87 people for employment tax evasion and 70 percent of those convicted were incarcerated at an average sentence of 14 months.
Engage a tax professional
The bottom line is that when a business is set up, an experienced tax attorney should be on board to provide information and guidance about tax withholding responsibilities. Sometimes this payroll function is conducted in house, but sometimes outsourced to companies that specialize in this process.
Business executives, owners and other higher-level employees may be considered in tax law to be responsible parties for purposes of withholding tax responsibilities. This could open up an executive to personal liability for taxes not properly withheld or paid over to the IRS. Responsible parties can be assessed the Trust fund Recovery Penalty or TFRP, a civil penalty that can does not require “evil intent or bad motive” to be imposed.
It is not a defense that the responsibility was delegated to another department or even to a contracted provider. For this reason, it behooves such a person to oversee the function to be sure it is being done according to law. Delegating the responsibility and forgetting about it or ignoring problems in its execution can result in personal trouble with the IRS.
Anyone facing IRS charges of or investigation for employment tax withholding violations should talk to a tax attorney immediately to understand how to respond. A lawyer will communicate with and negotiate a solution if possible with the IRS. Should it end up a criminal matter, legal counsel can vigorously fight the charges through negotiation if possible and in trial if necessary.
Tax lawyer Lance Drury of The Law Firm of Lance R. Drury in Ste. Genevieve, St. Louis, Missouri, represents employers and employees facing employment tax withholding and payment issues.