One of the most common problems that businesses face is payroll tax issues. There are various ways that businesses get into trouble with payroll tax.
Failing to deposit payroll taxes
Employers are required to withhold payroll taxes from employee paychecks. Next, the payroll taxes have to be deposited with the IRS and the State (for California, the Employment Development Department [EDD] handles state payroll taxes) at designated intervals. Failing to deposit payroll taxes and instead keeping the money to pay business operating expenses or the business owners' personal expenses is a clear violation of tax law.
Failing to file payroll tax returns
In addition to the requirement to deposit payroll taxes with the IRS and State, employers have to file payroll tax returns. with both agencies.
Filing late payroll tax returns
Filing tax returns late is better than never filing them at all. However, it could lead to a scrutiny by one or more tax agency.
Filing false payroll tax returns
While it is important to file payroll tax returns, filing a false return could lead to civil and criminal liability.
When a company remains in business despite failing to deposit payroll taxes, it can lead to civil and criminal liability similar to filing a false payroll tax return. IRS Revenue Officers (RO) are tasked with tax collection. They investigate companies pyramiding and can impose various penalties as well as make a referral to the IRS Criminal Investigation Division (IRS-CID).
Trust Fund Recovery Penalty (TFRP)
IRS Revenue Officers can conduct a Trust Fund Recovery Penalty (TFRP) investigation to determine responsible parties to hold liable for the trust fund portion of delinquent payroll taxes. This includes the amount of employee individual income tax and Social Security and Medicare (aka, FICA). While the business is responsible for paying the delinquent payroll taxes, the Trust Fund Recovery Penalty (TFRP) can be assessed against an owner, officer, bookkeeper, payroll tax employee or anyone else deemed liable. The TFRP is a civil penalty of 100% of the trust fund taxes against the individual.
While IRS Revenue Officers (RO) handle tax collection, Revenue Agents (RA) handle field audits. RA's can conduct payroll tax audits that introduces a different set of issues for a business with payroll tax problems.
Employment Development Department (EDD) of California employees can conduct similar investigations for state payroll tax non-compliance.
Solutions to the above problems can include getting the business back into compliance by making current payroll tax deposits. Businesses can go back and file delinquent payroll tax returns and payoff the payroll taxes due if they have the funds. They can also get a better system together to set reminders when payroll tax filing deadlines approach to avoid late filing their returns. As for pyramiding, the company will have to determine if the business is viable and whether or not to shut the business down to prevent further unpaid payroll tax liability accruing. Pyramiding can lead to criminal investigations the longer the business stays in operation. Trust Fund Recovery Penalty (TFRP) investigations will need the parties identified by Revenue Officers (RO) to decide whether or not they believe they are a responsible party. If they want to dispute the issue they should hire a tax representative or attempt to represent themselves during the Trust Fund Recovery Penalty (TFRP) interview. On the other hand, if they accept responsibility they can let the RO know their decision and move forward.
There are various collection alternatives available to a taxpayer that cannot afford to pay the assessed payroll tax or Trust Fund Recovery Penalty (TFRP) in full:
Lastly, after a payroll tax audit or Trust Fund Recovery Penalty (TFRP) investigation, taxpayers that disagree with the outcome can file a petition to the IRS or State Appeals division. An independent third party will review the details of the situation and make a determination based on the evidence. Many taxpayers have succeeded in overturning audits or collections at the Appeals level so be ready to go if you think you have a good case.