Posted by Income Taxes and Bookkeeping LLC

Are You at Risk of Payroll Tax Violations?

Are You at Risk of Payroll Tax Violations?

Under federal law, employers are required to withhold certain funds from their employees' salaries and remit them to the Internal Revenue Service in the form of income and payroll taxes. 26 United States Code, Sec. 6672(a) provides that "any person who is required to collect, account for and honestly pay a tax" who willfully fails to do so shall be liable "to a fine equal to the total amount of the tax" not paid over.

The term "any person" is imperative because it allows the IRS to personally hold certain people in a business for unpaid employer payroll taxes. This distinction is important because it neutralizes one of the main advantages of the existence of a legal person, namely the limitation of the personal liability of those who manage the company. Therefore, the "limited liability" in the LLC or limited liability company.  

A responsible person is an individual or group of persons who have to perform and have the power to direct the collection, accounting, and payment of taxes on trust funds. The Internal Revenue Service can personally prosecute any "responsible person" of a business who does not pay payroll taxes, even if not the business owner. This could be a director or employee of a company, a member or employee of a partnership, a director or a company shareholder, a board member of a non-profit organization, and even a payroll service provider.

Recently, companies that raise funds from their employees to pay payroll taxes and then reallocate the funds to their own benefit have become the primary targets of the IRS. It is important to reiterate that the risk is not limited to the loss of trades. Instead, personal liability and criminal charges are very real risks.

IRS investigations are complex, and defending any claim costs everyone involved time, stress, and money. 

The penalty for recovering the trust fund is intimidating because it is real.

The IRS website explains that "in order to encourage the timely payment of withheld payment and employment taxes, Congress passed legislation establishing the TFRP. The Trust Fund Recovery Act (TFRP) is so named because the employer withholds money from an employee's salary and keeps it "in trust" until the funds are remitted as a federal tax deposit.

Once the IRS ascertains who is responsible for a deliberate wage violation, it provides a letter stating that the person has 60 days to appeal. Unless you appeal, this 60-day letter will be followed by a notice and request for payment.

What does it mean to be wilful?

The demonstration of lawfulness is a crucial aspect of the prosecution burden in almost all criminal tax proceedings. In general, courts have found that willfulness is present if a taxpayer knows and neglects a particular debt or obligation.

In these cases, a big red sign for the IRS is when a company uses available funds to pay other creditors. A business that is struggling, or even a healthy business with cash flow problems. When a company pays its creditors, it would otherwise be unable to pay with "trust fund" payroll taxes; it is seen as an indication of "willfulness." In other words, the fact that a company has debts that it has not been able to pay will serve as proof of its willingness to commit the crime. This is because these are the circumstances that are most likely to lead to this crime.

It is essential to understand that acting under pressure or even under duress hardly justifies bad actions. Defendants will often claim that they acted under the stress of extreme hardship or extenuating circumstances in the hope that the court will show leniency. However, it is unlikely that a court will take into account the financial situation of an individual or business in determining whether the non-payment of a tax owing was deliberate.


According to the IRS, the amount of the fine is equal to the taxable balance of the unpaid trust fund, and the fine is based on the unpaid amount of tax on the collected excise taxes. In addition to the subsequent taxes and interest that will be due for unpaid taxes on the trust fund, the penalties for the trust funds can increase exponentially over time. To make matters worse, penalties cannot be waived in the event of bankruptcy.

No matter how serious the fines for non-payment of trust fund fees are, it is even more serious that the non-payment of trust fund fees could result in criminal prosecution and imprisonment. Historically, criminal charges have been reserved for the most egregious cases or a threat used to benefit the government in negotiating guilt. Still, recently the IRS has become increasingly willing to initiate criminal proceedings against those who intentionally break the law. The IRS is aggressive in assessing the sanction of the trust fund and becomes more aggressive in pursuing criminal prosecutions.

If you or your firm has received an IRS audit notice or received communications from the IRS that you do not understand, you must contact a tax attorney as soon as possible. Mistakes made quickly in the process can lead to otherwise preventable consequences, such as confiscation of property, fines, and even jail time.

Is the IRS looking at me and my small business?

Assuming that your business will go unnoticed by the IRS is one of the main reasons small businesses may be particularly vulnerable to litigation under the Trust Fund Recovery Act. On the other hand, large companies include these guarantees in their annual budgets and often have teams of lawyers waiting in the event of a mishap.

Instead, out of necessity, many small businesses delegate accounting responsibilities and work duties to employees far beyond their experience. The US tax code is one of the most complicated that has ever existed. Even the most honest, well-known, and hard-working employees face many opportunities to run afoul with the IRS. If someone is actively trying to commit financial fraud, a small business often doesn't have the oversight to spot it until it's too late. Except to the extent that it is a defense to willfulness, sloppy bookkeeping is a flawed excuse.

Avoid the TFRP

You can avoid the TFRP by making sure all business taxes are collected, displayed, and paid to the IRS when needed. Make your deposits and payments on time. A tax professional can help you protect your business and your assets, including your freedom.



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