What are the consequences of not paying employment taxes on time?
When employment taxes are not paid on time, the IRS will impose harsh penalties due to the fact that a portion of these funds actually belongs to the employee and is simply being held in trust by the employer until the required tax amounts are paid. Business owners who fail to meet payroll tax deadlines can often end up having to pay the delinquent tax balances from their personal funds and, on occasion, can even end up in jail.
What is the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty is a harsh penalty assessed by the IRS for the purpose of collecting delinquent “trust fund” taxes owed to the Federal Government. This penalty, which is equal to 100% of the tax balance owed, is imposed when a business fails to meet its employment tax deadlines. Although it is called a penalty, the Trust Fund Recovery Penalty is used only to collect the amount of the unpaid taxes and does not impose an additional penalty over this amount.
What are “trust fund” taxes?
The “trust fund” taxes are taxes a company withholds from an employee’s paycheck. They include Medicare, Social Security and federal withholding taxes. Medicare and Social Security taxes are the taxes that pay for benefits provided by the Federal Insurance Contributions Act. This legislation requires that an employer withhold a certain percentage of an employee’s wages and then match the amount withheld. The Medicare Tax pays for medical benefits specified by the FICA legislation while the Social Security Tax pays for benefits for retirees, survivors and the disabled. The federal withholding taxes are simply the federal income taxes that are withheld from an employee’s paycheck. These “trust fund” taxes are predetermined percentages of an employee’s wages calculated from information on the employee’s Form W-4.
What is the procedure for imposing the Trust Fund Recovery Penalty?
If the IRS plans to assess the Trust Fund Recovery Penalty against a particular person, it will send that person and official IRS Notice. The notice will state the amount of the penalty and will also explain the person’s appeal rights. If the recipient of the notice does not respond within 60 days, the IRS will assess the penalty by sending a Notice and Demand for Payment.
How is responsibility determined under the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty can assign blame to anyone who was in any way responsible for a payroll tax debt. Such responsible individuals can include corporate officers and directors, bookkeepers and involved third parties such as CPAs and corporate counsel. The IRS can impose the Trust Fund Recovery Penalty on anyone who has knowledge of the unpaid taxes and who has control over the disbursement of corporate funds even though that individual may not have the final authority on who should be paid.
Due to the complexity of business tax law, the best approach to handling any business tax issue is often to enlist the help of a qualified tax professional. For more information about our full range of business tax and business accounting services, visit us today at www.businesstaxpreparation.com. Contact us by phone at (866) 676-9417 or by email at info@businesstaxpreparation.com to receive a free, no obligation consultation.