Employers: IRS is investing in payroll tax education and enforcement

Employers must sit up and take note of their payroll tax collection responsibilities to avoid business and personal liabilities.

Business owners, executives, officers, directors and payroll managers should take note of the IRS' current push to enforce payroll tax collection laws. According to CPA Practice Advisor, almost three-quarters of IRS revenue is comprised of payroll taxes that employers withhold from employee paychecks and turn over to the IRS. It is not surprising, then, that the IRS is interested in seeing that employers fully comply with their collection responsibilities as required by law.

Federal taxes that may be subject to withholding include income tax, Social Security and Medicare. Employers themselves are also responsible for paying federal unemployment taxes.

IRS outreach campaign

From March 25 to April 5, 2019, the IRS contacted almost 100 business employers across the country that were "showing signs of potential serious noncompliance," writes CPA Practice Advisor. IRS personnel provided education and guidance to help ensure compliance. In addition, IRS Criminal Investigation took action against "several dozen" employers whose noncompliant actions rose to the level of criminal liability.

When an employer fails to meet its payroll tax responsibilities, such as by failing to withhold appropriate federal taxes from paychecks, not depositing the funds into a qualified financial institution for safekeeping or by not submitting the collected money to the IRS in a timely fashion, the employer opens itself up to the Trust Fund Recovery Penalty or TFRP.

Civil penalty

The TFRP is a potentially hefty civil financial penalty for willfully failing to comply with payroll withholding laws. It is important that individuals with responsibility for payroll tax functions understand that failure to comply opens up not only the employer as an entity, but also responsible persons on an individual basis to the TFRP.

Individuals who could be vulnerable to TFRP penalties include:

  • Owners
  • Directors and officers
  • Executives and key managers
  • Partners and LLC members
  • Accountants and other fiduciaries
  • And others

Noncompliance must be willful for TFRP liability to attach. The IRS views willfulness very broadly. For example, while intentional actions that do not follow payroll rules or misappropriation of collected taxes are obviously willful, the IRS may even reach further. The agency may assess the TRFP against an individual who ignores withholding responsibilities or does not set up a system to properly withhold and submit payroll taxes when he or she knows the law requires it.

The Service may even consider assessing the penalty against an employer that retains a third-party company to perform its payroll withholding responsibilities when that company fails to comply with the law.

Clearly, the current outreach to faltering employers shows that the IRS is actively watching for signs of noncompliance and will not hesitate to enforce these laws. To force compliance, the agency may collect taxes due through asset seizure, wage garnishment of responsible individuals or lawsuits.

Any employer, executive or business owner who has heard from the IRS about payroll issues should immediately contact a tax lawyer for guidance about options for responding and coming into compliance, if necessary. Ideally, an employer seeks advice and counsel of a tax attorney early on to be sure the payroll withholding system is set up in compliance with the law.

The tax lawyers at Brown, PC, in Fort Worth represent companies, employers, executives and high net worth individuals in Texas and nationally in all matters concerning payroll taxes, TFRP and related criminal liability.

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