Businesses are having a tough time. Even before COVID, many businesses failed each year. Many of then were undercapitalized from the time they started. So, it isn't hard to believe that businesses can fall behind on their payroll taxes. It can be tempting to not pay the payroll taxes so that you can keep the lights on. This kind of business tax debt can become your personal tax debt.
I am a tax attorney in Minneapolis, Minnesota. I represent taxpayers before the IRS and state tax authorities. I handle tax debts, audit defense, payroll tax issues, and criminal tax matters. Money that a business withholds from an employees paycheck such as income tax, FICA, and medicare are trust funds. The business holds the governments money for them in trust until the deposit date.
When a business takes this money and pays its own bills, the IRS views this as theft. You took their money and spent it. That's their view. Because of this, the IRS increasingly takes an aggressive approach to enforcing payroll taxes. This can become criminal and criminal referrals are on the rise.
When a business doesn't make their deposit, the IRS requires Revenue Officers to assess a Trust Fund Repayment Penalty. (FTRP) This penalty is contained within Internal Revenue Code § 6672 (IRC § 6672). This section of the law allows the IRS to personally assess:
“any person required to collect, truthfully account for and pay over any tax imposed” and “who willfully fails to collect such tax or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof”
So, this penalty can be assessed against anyone who was responsible for the payroll taxes in the business that willfully causes the business not to pay it. If you are responsible and willfully fail to deposit then you will get hit with this 100% penalty. You'll personally owe the entire tax.
There is some good news. You won't owe any penalties that the business was assessed. Just the amount that was owed to the government from the employees, but wasn't paid. Even if the business closes down, this penalty will follow the responsible people.
These people are commonly assessed with this penalty:
This can come as a shock. It isn't just the owners. It can be employees, managers, and even tax professionals and family members. Responsible person is a broad term. It is also a fact sensitive inquiry. Not all of these people will be ruled to be a responsible person. Also, even if you are a responsible person then you might not have willfully failed to deposit. It is important to seek out advice from a competent tax attorney if you are assessed with this penalty.
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