Taxation & Estate Planning

IRS Promises They Can and Will Do Better Collecting Payroll Taxes

By Darrin Mish

The IRS claims that businesses have withheld billions of dollars in employment taxes that have never been paid. Congress has recently criticized enforcement efforts and in turn the IRS has made collecting these taxes one of their most important tasks. Since the 2002 tax year revenue agents have nearly doubled their success in collecting against past due business accounts. Businesses shutting their doors or experiencing financial hardship resulted in $30 billion in outstanding payroll liability being classified as not collectible last year.
IRS efforts to speed up collections will be focused on the more timely filing of liens and levies, as well as an expedited process to assess the Trust Fund Recovery Penalty. When a business shuts down, the owners, officers and other responsible parties are assessed a Trust Fund Recovery Penalty. This penalty (commonly known as the 100%) penalty represents the "trust fund" portion of an employees wages withheld from each paycheck. The employees' portion of social security and medicare taxes, plus federal income tax withheld from wages is the "trust fund" portion. When applied, the penalty is assessed personally against the owners, officers and responsible parties of the defunct business.

These penalties are not dischargeable in bankruptcy and carry joint and several liability. This means that each party determined to be responsible is obligated to pay the entire penalty and must seek redress from the other parties if the IRS is able to collect the outstanding balance from a single party. This carries particular weight with small and closely held businesses that have a single or small number of stockholders that may serve as officers as well. In other words, really be careful who you go into business with. If you are the "money" behind the "brains" in a business venture and it goes south, the IRS will collect from you, leaving you to collect from the "idea" guy.

S Corporations are particularly at risk considering the establishment of new audit operations targeting these businesses and their desire to "reclassify" profits as wages for self-employed owners. A self-employed small business owner is not only at a substantially increased risk of being audited, but the result of that audit could be disastrous with thousands of dollars in penalties and interest from profits being reclassified as wages to the owner, in addition to the new underlying tax liability. A single year's audit could put many S corps out of business, leaving the owner personally liable for back payroll taxes. If you are a small business owner faced with an audit, seek professional help before, your first contact with the IRS examiner. Failure to do so could cost you not only thousands in additional taxes, but your livelihood as well.

Full post as published by IRS Problem Solver Blog on August 15, 2008 (boomark / email).