From juggling operations to managing employees, as a business owner you likely wear many hats. Are you also in charge of managing expenses and payroll, while staying on top of paying your taxes? What happens when there's a financial struggle? It can be tempting to dip into or "borrow" from the payroll taxes you withheld, and then replace the funds as business picks up.
But what if business doesn't pick up? How will you recover the funds your business now owes to the IRS?
When you distribute payroll checks to your employees, you become a trustee for the U.S. government as you withhold payroll taxes. Payroll taxes are called "trust fund taxes" because you are holding onto them on behalf of the government. If these funds are used to pay for business expenses such as rent or utilities, you may have to pay a penalty, called a Trust Fund Recovery Penalty. Even if your intentions were good, and you were trying to save your company from shuttering the doors or filing for bankruptcy, the IRS will impose this penalty.
What is the Trust Fund Recovery Penalty?
The penalty is 100 percent of your delinquent trust fund taxes. The penalty can be imposed even if the IRS has not yet tried to collect the unpaid taxes from your business. The IRS can also charge you interest on the penalty.
What if I am taken to federal court over unpaid payroll taxes?
Failing to pay payroll taxes could turn into criminal charges. If you are charged with and convicted of employment tax fraud, the outcome could include prison sentences. A recent example was a business owner in Pennsylvania who was convicted of 16 counts of failure to collect, account for and pay employment taxes. He did not pay over to the IRS more than $790,000 in withheld taxes.
The good news is that a tax litigation attorney can help, even before it gets to that point. A significant penalty or criminal tax charge is serious and can derail your business. Having a skilled attorney by your side can lighten the burden. A tax lawyer can:
- Make sure the IRS has correctly calculated your tax obligation. If there is an error, you could owe less than you initially thought.
- Negotiate with the IRS to continue operations while you pay the debt through a payment plan that might extend your payments over time and reduce penalties and interest.
The penalties are serious, but owing payroll taxes to the IRS does not mean you failed as a business owner or that you can no longer continue running your dream business. You worked hard to make sure your business was the best it could be, and there are ways to deal with the legal issues you are facing. A tax litigation attorney can help you understand the tax implications and advise you on the best strategy forward.