Payroll Tax Penalties: Make them Your Priority

When business is slow, small business owners might find themselves so strapped for cash that they neglect to remit payroll taxes to the IRS in favor of paying employees, the rent or the electric bill.

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However, when an employer fails to turn over the taxes withheld and the matching employment taxes to the IRS, they are setting themselves up for some whopping penalties.

The most expensive of these penalties is the Trust Fund Recovery Penalty (TFRP), which is a civil penalty equivalent to 100% of the total payroll taxes owed. The IRS will go after the business, the principals of the business and anyone employed by the business that has signing power in order to collect these taxes.

Vanessa Borges, expert tax preparation supervisor for the Tax Defense Network says these tactics are “just and it’s right because it’s theft in the eyes of the IRS.” She went on to say that “Many of these business owners live lavish lifestyles and never bother with the paperwork much less payment of the taxes.”

But there are other owners however, who intend to pay but do not have the means.

According to a recent report by the Treasury Inspector General for Tax Administration (TIGTA), as of June 30, 2012, employers owed the IRS approximately $14.1 billion in delinquent employment taxes.”

That’s a lot of money.

The TIGTA recently audited the IRS over this issue. The report concludes that “TFRP actions were not always timely or adequate.  Specifically, TIGTA found untimely TFRP actions, expired assessment statutes, unsupported collectability determinations, and incomplete TFRP investigations associated with installment agreement and currently not collectible cases.  TFRP actions were untimely and/or inadequate in 99 of the 265 cases reviewed in a statistically valid sample.  For 59 of the 99 cases, the untimely actions averaged more than 500 days to review and process the TFRP assessment.”

That’s a lot of time.

The longer the cases linger without a proper assessment, the more the taxpayer’s ability to pay can decline, hindering the collection efforts.

The IRS agreed with all of the recommendations submitted by TIGTA and plans to take corrective actions.

Business owners who neglected remitting payroll taxes due to lack of funds can seek penalty relief by filling out IRS Form 843. But there again, it’s a long haul. I have several cases pending since last November that are just now being assigned to an examiner.

One caveat is that the taxpayer is required to pay the liability with Form 843. That’s usually impossible for many, however, making a partial payment or setting up an installment agreement will reinforce intent and the case may be considered.

Borges suggests, “Taxpayers should provide complete financial statements to the revenue officers, who will investigate their ability to pay thoroughly. They will come out to the taxpayer’s place of business and their homes to examine assets and determine collectability.”

To avoid this tedious ordeal, I advise small business owners to bend over backwards and pinch pennies to remit the payroll taxes when due.