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Tell The IRS Where To Put It

By Cathy Moran, California Bankruptcy Lawyer

Business owners who find themselves liable for unpaid payroll taxes are in deep trouble.  The trust fund portion of the tax, the amount withheld from employees’ checks, becomes a personal debt of anyone in the business who could have paid that money over to the IRS.  Usually, trust funds make up about 2/3rds of the payroll tax.  The balance is the business’s share of Social Security.

Trust fund liability is not dischargeable in bankruptcy.  The statute of limitations is10 years and the IRS is a fearsome creditor.

If you find yourself in this pickle, you, and the business itself, can avail yourself of your right to earmark any payment you make on Form 941 liability. A taxpayer  who makes voluntary payments to the IRS has the right to designate to which liability the payment will be applied. In re Ribs-R-Us, Inc., 828 F.2d 199, 201 (3rd Cir. 1987).

An earmark is simply a direction as to how the payment is to be credited.  Pay voluntarily and you have the right to tell the IRS what to do with the money.

Without instructions, the IRS is free to apply payment it receives on the tax debt as it chooses.  And it chooses the manner of application that benefits it best.  Send a check for payroll taxes and if the check is not enough to pay the entire liability, the IRS applies it first to the dischargeable portion of the tax first, preserving the personal liability of the business owners for the remaining tax.

Likewise, if the IRS levies an account, they may apply the levied funds as they wish.

Write directions on the check, and you can insure that each dollar paid on payroll taxes is applied to the portion of the debt that will follow the individuals around, long after the business has failed.

Of course, the better course of action is to remain current on payroll taxes.  Use a payroll service that won’t cut the checks unless the taxes are paid, or make a tax  deposit  with each payroll. Dip into the money withheld from employees and you’ve taken a “loan” that lives forever.

Earmarks registered to  my great great grandmother, Territory of Arizona, 1898.

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Full post as published by Credit Law Network on February 10, 2011 (boomark / email).