Entrepreneurs are an optimistic lot. Unfortunately, the present economic downturn has proven that such optimism is not always well-founded. Payroll tax problems usually start when cash-strapped small businesses delay payment of their payroll taxes and instead use the funds collected from their employees for general business purposes. A typical owner of such a small business hopes that as soon as the business improves, he or she will remit the payroll or employment taxes to the IRS. However, similar to other IRS tax obligations, the obligation to timely pay payroll taxes does not depend on business conditions. A small business owner or even a low-level employee of the business may be found to be personally responsible for withheld but unpaid payroll taxes. This is called the Trust Fund Recovery Penalty (TFRP) and is different from other tax penalties (such as the penalty for underpayment of personal income taxes) in that an individual may be held responsible for the unpaid payroll taxes of a business. The amount of the penalty equals the amount of unpaid or underpaid withholding tax liability related to payroll taxes. Additional tax penalties relating, for example, to failure to file (unfiled) payroll tax returns (Form 941) may be applied as well. Incorporation of the business or organizing the business as a limited liability company (LLC) would not prevent the IRS from targeting individuals within the business and holding them personally responsible for back taxes of the business and any 941 liability. The IRS assessment of the Trust Fund Recovery Penalty (TFRP) not only jeopardizes business prospects, but also threatens the financial survival of the individual who has been found by the IRS to be responsible for unpaid payroll taxes which include income taxes, Social Security taxes and Medicare taxes.
Small business owners should also ascertain that the IRS applies their payroll tax payments and deposits to the tax periods intended by such owners. The misapplication of tax deposits to tax periods different from those intended by the taxpayer frequently results in assessment of additional tax penalties and inflated tax bills.
If you have been contacted by the IRS as part of their investigation to determine the identity of the individuals to be held personally responsible for the Trust Fund Recovery Penalty, or if you have received a tax bill, a notice of intent to lien or levy or a notice of delinquency related to failure to pay trust fund taxes, contact Kamyar Mehdiyoun, tax controversy lawyer in Rockville, Maryland. We are a tax law firm specializing in tax dispute matters. The IRS applies strict time limits in order to collect delinquent payroll tax obligations and a delay may result in aggressive IRS collection activities such as imposing tax liens, tax levies or property seizures including garnishment and seizure of personal or business bank accounts.