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Accounting - Beware the payroll tax quicksand pit!

image Kathleen Dvorak, CPA RidoutBarrett, San Antonio / Austin, TX

AUSTIN - If an employer gets in deep with past due payroll taxes, especially if in excess of $24,999, it can be difficult to claw out of the quagmire. Getting back into compliance can be time consuming, labor intensive and expensive. The employer often needs assistance from a tax professional and penalties and interest can be very high.





    The IRS is strict when it comes to unpaid payroll taxes.  They often see it as theft from employees’ paychecks (the employer withholds taxes from employee paychecks but keeps the money rather than pay it to the government on the employee’s behalf).  The IRS does not take kindly to corporate owners claiming withholding on their personal tax returns for payroll taxes never submitted to the IRS.

    In addition to the business being held liable for the employee and employer payroll taxes, any individual the IRS determines to have been a responsible party, may also be held 100% personally liable for the Trust Fund Penalty.  The Trust Fund Penalty is the Income Tax, Social Security and Medicare taxes withheld from employees’ pay but not remitted to the IRS.  In determining to whom they may assess Trust Fund Penalty, the IRS will interview everyone who had signature authority, paid bills or signed payroll reports.  Unlike corporate shareholders, sole proprietors and partners in a partnership may be held personally responsible for both employer and employee taxes, rather than for just the Trust Fund Penalty.

    Unpaid balances of less than $25,000 may be eligible for the IRS Streamline process in which an installment payment plan can be established quickly and avoid having to provide the IRS with financial information.  For balances of $25,000 or more, a Revenue Officer, whose primary job is collections, gets involved.  Here’s where the quicksand grabs hold with ferocity.  A tax lien is usually filed against property.  This can be especially problematic as vendors and potential customers become aware of the lien. The Revenue Officer requires the taxpayer to provide a huge volume of financial documents on the business and its owners including financial statements, federal tax returns, lists of venders and customers, bank statements, loan documents, asset lists, lease agreements and more.  The taxpayer is required to sign under penalties of perjury that the information provided is accurate.  The Revenue Officer examines these records and determines how much the business and the owner (using IRS allowable standards for living expenses) can afford to pay.  The IRS will investigate and research such things as asset ownership, equity in homes, social media and lifestyle in order to determine ability to pay.  They will look for assets recently transferred or sold and want to know what became of the sale proceeds.

    A taxpayer will receive many IRS notices before the case goes to a Revenue Officer. These notices should never be ignored.  Taxpayers should respond and express the desire to come into compliance, or retain a tax professional for guidance and to represent them before the IRS.   Ignoring the notices may result in levies on bank accounts or on revenues owed from customers.  The “final Notice of Intent to Levy” is an indication that it’s being assigned to a Revenue Officer for aggressive collection.

    The employer should avoid continuing to fall behind on current payroll taxes.  The IRS refers to this as “pyramiding”.  In order to negotiate a payment plan, the IRS will want to see that current payroll taxes are being paid.  Collection action stops when a payment agreement has been reached, but the IRS may want the lien to remain in place to protect their interest.  Penalty and interest continues to mount on unpaid balances and, although less severe, they will continue to accrue after an installment payment plan has been established.

    Employers are well advised to remain current and avoid getting sucked into the payroll tax quicksand pit!

Kathleen Dvorak obtained her CPA license in 1988 while working in private industry.  Kathleen went into Public Accounting in 2001.  In 2005 she joined RidoutBarrett, an accounting firm with offices in San Antonio and Austin, and became a Shareholder in 2011.

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