Finis Cowan, Attorney - Retired CPA

The IRS uses Enforced Collection measures to collect unpaid payroll taxes. Enforced Collection can include seizure of the assets of the business, including the accounts receivable, equipment, automobiles and the bank account. The IRS can close a business for non-payment of payroll taxes. 

CI Chief Mark Mathews, ( Tax Talk Today, January 22, 2002) said the IRS, Criminal Investigation Division is shifting its focus from drug crimes and money laundering to traditional tax crimes involving abusive trusts, employment taxes, nonfilers, and return preparers.

"Employment tax investigations are up 75 percent", Mathews said. "CI has seen an upswing in employee leasing schemes and nonpayment of payroll taxes in the last 18 months. CI is interested in egregious cases involving badges of fraud, rather than nonpayment cases where employers are short of funds and decides to pay other creditors instead of the IRS. The issue is whether the funds were used to keep a business afloat or to line the employer's pockets."

If the payroll returns are not filed on time the penalties are substantially increased. Failure to file a return on time can incur penalties of 5% per month to a maximum of 25%. Add that to other penalties, along with the compounded interest and you can have a very serious tax problem.

If the business does not pay employment taxes, the IRS will look to the owner and managers of the business for collection of the penalties, interest, taxes and trust funds.  In the case of a corporation or a partnership, the IRS will look to the person responsible for paying the payroll taxes to collect the trust funds. This is not dischargeable in bankruptcy.

IRC Section 6672(a): Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for or pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

This is commonly known as the 100% penalty. The penalty is assessed for the Trust Funds not paid. Trust funds are the money you withhold from an employee's paycheck, which includes federal income tax and the employees' share of FICA and Medicare.

Who is a responsible person?

According to the IRS, a responsible person is a person or group of people who have the duty, power and authority to direct the collection, accounting and payment of employment taxesor power and authority to determine who gets paid first or last. This person may be:

• an officer or an employee of a corporation
• a member or employee of a partnership
• a corporate director or shareholder
• a member of a board of trustees of a nonprofit organization, or
• another person with the authority and control to direct the disbursement of funds.

The IRS may assess the penalty against anyone:

• who is responsible for collecting or paying withheld income and employment taxes, and
• who willfully fails to collect or pay them.

According to the IRS, for willfulness to exist, the responsible person must:

• Have known about the unpaid taxes, and
• Have used the funds to keep the business going or allowed available funds to be paid to other creditors.
• Other standards regarding willfulness include intentional, deliberate, voluntary, reckless disregard, knowing or accidental, free will or choice.