The liability for properly accounting for and handling business trust fund taxes is a part of doing business for every company, corporation, or other business entity that employs individuals. Despite this nearly universal obligation faced by business operators and owners, it is nevertheless one of the more common areas where tax problems can develop for a business. In most circumstances mistakes regarding payroll taxes have civil consequences in the form of a monetary fine. However in some scenarios where it appears that the noncompliance was willful, a criminal investigation and prosecution can follow. Willful violations are those involving a voluntary or intentional disregard of a known legal duty.
The Tax Law Offices of David W. Klasing is dedicated to assisting both business owners and employees in regards to payroll and trust fund taxes. We have more than 20 years of experience advocating for taxpayers and mitigating the civil or criminal tax consequences they face.
What are Business Trust Fund Taxes and What must an Employer do?
Trust fund taxes are most identifiable in the context of payroll taxes. An employer has an obligation to withhold applicable tax from the employee’s wages, hold those funds in trust for the government and then turn over those funds to the IRS or state taxing authority. Thus, the employer is acting as a trustee for the government. This is one reason why the IRS is particular aggressive in pursuing those businesses that do not satisfy their trust fun obligations. Duties owed by employers include:
- Payment of applicable unemployment taxes on employee wages as per the requirements set forth in the Federal Unemployment Tax Act (FUTA).
- Withholding from employee wages for income tax purposes.
- Collection of Social Security and Medicare taxes as per the requirements set forth in the Federal Insurance Contribution Act (FICA).
- Compliance with workers’ compensation laws and other workplace safety and other labor laws.
- Providing fringe benefits as per the terms of the employment contract including the duty to contribute to pension account, retirement plan, life insurance policy, vacation pay, sick pay, and other benefits.
An employer who must withhold income taxes from wages must make a quarterly return on Form 941.
What are the Penalties for Failing to Withhold Trust Fund Taxes?
The consequences for employers who fail to adhere to the trust fund obligations can be both civil and criminal in nature. At the civil level, § 6672(a) of the US Tax Code states, that any individual who is require to “collect, truthfully account for, and pay over any tax…who willfully fails” to take such action is personally liable for the amount of tax equal to the amount that was not paid over to the IRS. § 6672(a) essentially makes the person in the organization responsible for such tax members a personal guarantor. This provision exists perhaps because it is common for businesses facing cash flow problems to forego the regular and expected payment of their trust fund tax and instead use the funds to ensure the continued operation of the business. However as held in Collins v. United States, the funds existed for the exclusive use of the government – not the employer. That is, the court holds that “payment of these trust fund taxes is not excused merely because as a matter of sound business judgment, the money was paid to suppliers in order to keep the corporation operating as a going concern – the government cannot be made an unwilling partner in a floundering business.”
Criminal liability for failures of this type can be found under § 6672 of the US Tax Code. An individual who willfully fails to perform the duties discussed in the previous paragraph can be convicted of a felony. Upon conviction the individual can be liable for fines of up to $10,000 for each violation and the costs of the prosecution. A prison sentence of up to 5 years can also be imposed.
Consider the Consequences Faced by this Washington Business Owner
The recent conviction of a Washington business owner should give pause to any business owner or operator who suspects that there may be issues in the company’s payment of payroll taxes. Maria Elizabeth Townsend was the president and majority owner in an electrical contracting company known as Townsend Controls Inc. (TCI). Ms. Townsend appropriately withheld employment taxes from the wages of employees, however she failed to turn over those funds to the IRS. Instead, the funds were utilized to finance Ms. Townsend’s lifestyle. Ms. Townsend was convicted and now faces a potential prison sentence of up to 5 years and up to a $250,000 fine — $10,000 for each of the 25 counts of failing to pay over employment taxes she was convicted of.
Failure to properly account for, hold and pay over trust fund taxes can result in significant tax problems for the business and personal liability for the underpayment of trust fund tax. David W. Klasing is a Tax Attorney and CPA dedicated to mitigating the consequences of tax problems. To schedule a reduced-rate tax consultation call 800-681-1295 or contact us online today.
