Payroll, or trust fund, taxes are deducted from an employee’s paycheck. These funds are an important source of government revenue making up more than two-thirds of all federal taxes collected. These taxes are used to fund government programs and services like Medicare and Social Security. However, despite the tax being drawn from the employee’s paycheck, the obligation to maintain compliance, initially, falls squarely on the shoulders of the employer and any responsible parties who may be accountable for handling payroll and taxes.
Unfortunately for many small business owners, the IRS knows that many small businesses do not have the resources to comply or are unaware of this obligation. Thus, the IRS is known to audit small businesses and other groups and industries where noncompliance is commonplace. In light of this fact and other data, the IRS has announced that it is launching a new tax enforcement initiative known as Early Interaction Initiative. The initiative is intended to catch problems earlier in the process before mistakes and errors become compounded by penalties and interest. However, employers who are contacted and then continue their noncompliance may be more likely to face criminal prosecution because the failure to satisfy one’s payroll tax obligation is a felony.
What will the Early Interaction Initiative Mean for Employer’s Payroll Tax Obligations?
According to the IRS, intervention and enforcement regarding unsatisfied payroll taxes currently occurs far too late in the process. By the time the employer is informed of the mistake or error, significant penalties have accumulated that can, and often do, imperil the continued viability of the business. One of the stated goals of the initiative is to avoid, “needless interest and penalty charges.” Employers who fail to remit required trust fund payments can quickly face mounting penalties and consequences. The IRS believes the chief reasons for payroll tax issues among businesses includes:
- Liquidity issues – Businesses that are facing shortfalls of liquidity or working capital may be tempted to divert funds intended for employment tax obligations for other purposes. “Robbing Peter to pay Paul” may seem like it will buy the business owner time to address the problems in the business, but more often than not it results in the business owner digging a deeper hole. Now, rather than a private individual seeking repayment for debts, the IRS and federal government will come to leverage their full authority and enforcement mechanisms.
- Miscommunications with a payroll processor – Many employers recognize that handling payroll taxes is a technical, highly focused endeavor where there is significant room for mistakes and error. As such, they may come to rely on a payroll processing company. However, miscommunications with the processing company can result in failures to withhold or report per employment tax obligations.
- Ignorance regarding the obligation – A company’s growth may outpace its founder’s or management’s ability to comply with the rules the growing company is subject to satisfy.
The Early Interaction Initiative is intended to detect and respond to these and other scenarios when coming back into compliance is still possible. However, organizations that fail to comply after receiving notice may be more likely to face harsh criminal penalties.
What are the Consequences of Unpaid Payroll Tax Obligations?
The penalties for violating federal employment tax obligations are harsh. Even before criminal penalties come into play, submitting an employment tax deposit one to five days late results in a two percent penalty. Other relevant penalties include:
- Employment tax payment six to fifteen days overdue: Five percent penalty
- Employment tax payment 16+ days overdue: Ten percent penalty
- Submit unpaid taxes more than 10 days after receiving IRS notice: 15 percent penalty
Furthermore, employees can also be affected by potential ineligibility for Social Security benefits. Many other penalties can apply, but this sampling provides a context of how quickly penalties can escalate even prior to considering any criminal liability.
Criminal liability can arise when the failure to pay or satisfy the employment tax obligation can be attributed to willfulness. When circumstances include a direct government communication warning the company or entity about its noncompliance, continued noncompliance is likely to be viewed more harshly. There is a possibility that the examiner may interpret the failure to comply after receiving a warning as a voluntary or intentional disregard of a known legal duty. When a failure to satisfy this obligation is willful, § 6672(a) of the U.S. Tax Code can be used to pierce the corporate veil and hold the responsible party personally accountable for the company’s unpaid payroll taxes. Furthermore, under §7202, a willful failure to comply can be punished by up to five years in federal prison and monetary fines.
Employment Tax Concerns?
If you have concerns regarding the handling of payroll tax in your organization, taking proactive steps to correct any potential non-compliance is essential. The experienced tax attorneys and CPAs of the Tax Law Offices of David W. Klasing can assist your business or organization in meeting these challenges. To schedule a reduced-rate employment tax compliance consultation or to discuss criminal or other charges related to unpaid employment tax, call 800-681-1295 today or contact us online.
