IRS Set 2 Traps for Payroll Taxes – How to Protect Yourself
If your business has problems with IRS payroll taxes, this blog is for you. The IRS set 2 traps for that business owner that’s fallen behind on payroll taxes, and you need to know about them.
The first trap is financial.
Before we talk about the trap, we’ll talk about who is subject to it. Let’s talk about who that person is. It could be the business owner that writes net paychecks for the business’s employees but does not file its quarterly tax return to report the amounts that were withheld from those employees’ paychecks.
Or, it could be that business owner that once those funds are withheld from the employees’ paychecks, doesn’t pay it over to the government. Instead, the business owner may use the funds for more immediate necessities like rent, business telephone, or maybe to meet next week’s payroll. Unfortunately, these things happen.
Now, if that business owner knows about their responsibilities and fails to meet those responsibilities, that is what you call willful failure. And all of these people are subject to IRS Trap #1.
IRS Trap # 1
26 US Code Section 6672 A – Failure to Collect and Pay Over Tax or Attempt to Evade or Defeat Tax
Any person required to collect, account for, and pay over any tax who willfully fails to collect that tax or account for and pay over that tax shall be subject to a penalty.
This means that anyone that has the known responsibility to withhold taxes from their employee’s paychecks, to report them and file those quarterly tax returns to pay over that tax and then fail to do it – that is called willful failure. And they just might get this penalty.
The penalty is called the Trust Fund Recovery Penalty. What it is, is an amount that’s exactly equal to the amount that you, as the business owner, withheld from those employees’ paychecks and didn’t pay over to the government.
Now, technically it’s supposed to be a tax responsibility of the business, but you’re being held personally responsible.
And therefore, you get a penalty for precisely the amount you withheld from those employees’ paychecks.
IRS Trap # 2
You just saw the language for IRS Code Section 6672 A. We will show you the same language from the criminal penalty of Section 7202, Willful Failure to Collect and Pay Over Tax.
26 US Code 7202 – Willful Failure to Collect and Pay Over Tax
Any person required to collect, account for, and pay over any tax who willfully fails to collect, or account for, and pay over any tax shall be guilty of a felony.
Those two sections are talking about the exact same person. And that’s why we say there are two traps. One of them is civil. It’s a financial penalty. The other is a criminal penalty. It’s the same language, the same set of rules, for the same person.
Now, obviously, this is bad news. No one wants to be in that position. However, there are things that you can do to protect yourself. We’re going to give you a couple of quick tips if you find yourself in this situation.
Protect Yourself – Quick Tips
1. Get In Compliance
First, you have to do what IRS likes to call “Get In Compliance.” No one likes that term, but this is what it means.
Going forward, you have got to file your tax returns on time, which includes those quarterly tax returns. You have to pay over those wages withheld from your employees’ paychecks. You have to make sure that you accurately account for those amounts, and you have to do it on time.
2. Defend yourself
The second thing is that you have to defend yourself. You need to protect yourself against that Trust Fund Recovery Penalty and the determination that you are the one who’s personally responsible.
Why is this so important? Because again, the same set of rules that determine you to have that financial penalty under 6672A determines your criminal liability under 7202.
Now to do this, you can’t just hire a tax resolution firm off the radio, and you can’t hire an accountant. You need an attorney for this because all these things have dire legal consequences.
These things are real. They happen, and they happen to innocent business owners, just like you.
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