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The IRS will aggressively pursue enforcement action against any employer that fails to timely file its quarterly federal tax return or make its quarterly payroll tax deposit, and can seize business assets, close down operations, file tax liens, impose significant penalties, hold business owners personally responsible, and file criminal charges.
The experienced tax attorneys at Segal, Cohen & Landis have successfully resolved complex payroll tax disputes for thousands of clients with a view to:
- ensure continued business operations,
- minimize imposition of penalties,
- avoid assessment of personal liability against owners and officers, and
- resolve the underlying tax liability.
Payroll Tax Basics
Payroll taxes are comprised of two parts. The first part refers to income tax on wages paid (calculated as per the employee’s W-4) plus the employee’s share of Social Security and Medicare tax. This part of the payroll tax consisting of the portion that is withheld from the employee’s wages is also referred to as a “trust fund” given that the employer is required to hold it in trust until depositing it with the IRS. The second part consists of the employer’s matching share of Social Security and Medicare tax on the employee’s wages.
All employers are required by law to withhold payroll taxes from their W-2 employees and to remit the employees’ portion and the employer’s portion of the payroll tax to the IRS. Employers must file IRS Form 941 and remit payroll taxes to the IRS each quarter. IRS Form 941 and Instructions. The 941 quarterly return is due by the last day of the month following the end of the quarter.
- Small employers whose annual liability for Social Security, Medicare and income tax is $1,000 or less for the year may file Form 944 annually in lieu of filing Form 941 quarterly. IRS Form 944 and Instructions
Significant Penalties for Failure to Timely File and Pay Payroll Tax
The failure to timely file Form 941 and make the requisite quarterly payroll tax deposits will subject an employer to significant penalties.
Employers that file Form 941 late will incur a penalty of 5% of the total tax due and will be charged an additional 5% each month the return is not submitted, up to 5 months or 25% of the total tax due.
Employers who fail to deposit payroll taxes to the IRS on time will be subject to the following penalties:
- 1-5 days late results in a penalty of 2% of the unpaid deposit.
- 6-15 days late results in a penalty of 5% of the unpaid deposit.
- 16 days late results in a penalty of 10% of the unpaid deposit.
- 10 days after the first IRS notice (CP220) or the day a notice for immediate payment (CP 504J) is received, results in a penalty of 15% of the unpaid deposit.
Personal Responsibility for Unpaid Payroll Tax
When a business fails to remit payroll taxes, the IRS has the authority to collect those taxes from “responsible persons” including shareholders, partners, officers, and employees of the business. A “responsible person” will have significant control or influence over the company’s finances, which could be based on any of the following:
- Ownership interest
- Job title
- Check-signing authority
- Hiring or firing authority
- Control over business payroll
- Power to make federal payroll deposits.
The IRS will conduct a Trust Fund Recovery Penalty Interview, also known as a 4180 Interview, to investigate who may be held personally liable for the unpaid payroll taxes of the business. Any individual found liable will be responsible for the trust fund portion of the payroll tax (the amount that was withheld from the employee’s wages) and in such case the IRS can seize the personal assets of the individual to satisfy the payroll tax liability of the business. The IRS has 3 years from the date the employer’s federal tax return was filed to assess trust fund recovery penalties against a responsible person.
It is advisable to retain counsel prior to participation in a 4180 Interview with an IRS Revenue Officer. Note that Trust Fund Recovery Penalties are not dischargeable in Chapter 7 Bankruptcy, regardless of when the taxes were assessed.
Payroll Taxes: Why You Need an SCL Tax Attorney
The experienced tax attorneys at Segal, Cohen & Landis have been helping clients navigate payroll tax issues with the IRS for over thirty years. We provide immediate and concrete solutions for our clients including but not limited to:
- Acquire a short-term deferment of payroll tax
- Secure a release of tax levy and unfreeze bank accounts to make funds available for the continuation of business
- Negotiate an installment agreement with the IRS so that the payroll tax debt can be paid over a period of years
- Secure a release of tax lien for the purpose of obtaining a loan to pay the tax due (lien subordination)
- Establish not collectible status for a struggling business
- Evaluate the potential tax savings of shutting down the business, changing entity structure or reorganizing and later establishing a new business
- Determine if the statute of limitations for collection of unpaid payroll tax has expired or will soon
- Avoid the assessment of personal liability for payroll taxes (trust fund recovery penalties)
- Submit an offer in compromise to reduce the amount of trust fund recovery penalties at issue
- File a claim for abatement of penalties
- Avoid the filing of criminal charges
Need Help with Payroll Tax?
Please feel free to contact us regarding your Payroll Tax. Every tax matter is unique because every person’s situation is unique. We can quickly and efficiently analyze your circumstances and propose various options of resolution.
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