Payroll Tax Problems

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When businesses have employees, but do not pay payroll taxes or file payroll tax returns, the IRS may levy assets of the business. These assets may include any and all income sources, accounts receivables, bank accounts, equipment, and vehicles. If necessary, the IRS may even shut down the business. Even if the business files for bankruptcy protection, the IRS can go to the owners, officers, and even employees of the business to collect the unpaid payroll liabilities. In certain cases, these individuals may be held personally liable for debt owed by the business.

The law requires employers to withhold FICA and income taxes when the employer pays salaries to their employees. The law does not require the employer to separate the withheld amounts from other funds. They are simply held in trust for the United States; therefore, they are commonly referred to as trust fund taxes. They belong to the United States and do not merely represent a debt of the employer. If these taxes are not paid to the IRS, personal liability will be imposed on those individuals who were responsible for, but didn't collect and pay, the withholding taxes. The IRS determines personal liability by interviewing the company's shareholders, officers, and directors. A trust fund recovery penalty is then assessed against the responsible parties for an amount equal to the unpaid withholding taxes.

If a corporate taxpayer cannot pay the state employment taxes it owes, the state may hold corporate officers and stockholders personally responsible. But with state payroll taxes, unlike the IRS trust fund recovery penalty for federal payroll taxes, responsible officers and shareholders will be held responsible not only for the trust fund portion, but all of the state employment taxes, including all interest and penalties.

Dramatic increases in the penalties that are associated with delinquent payroll tax deposits can occur within a matter of months. If no immediate action is taken to deal with the issue, you may find yourself out of business. An employer is required by law to report their payroll tax obligations, as well as to, in a timely manner, deposit payroll taxes. The reports have to include the wage and tax statements (W-2 Forms), the Annual Return of Withheld Federal Income Tax (Form 945), the annual federal unemployment tax return (Form 940), and an employer's quarterly payroll tax return (Form 941).

Often, businesses that have payroll tax problems with either the federal or state government will generally have payroll tax problems with both. Many state payroll tax problems are the result of a dispute with the state tax department over whether or not workers are employees or independent contractors. If the worker can convince the state that he or she is actually an employee, that business will typically get audited for payroll tax avoidance. State payroll tax audits can sometimes lead to discovering payroll tax fraud. This may happen if an employer pays workers in cash over several years and doesn't file 1099 forms (for independent workers), or in some other way tries to conceal the existence of those workers.

Following the complex and always changing statues and laws related to business taxes can often be difficult and that's why many business will enlist the services of a tax attorney. If you are running a successful business and do not want to fall victim to the unforgiving collection tactics of the IRS, contacting a small business owner can help avoid such circumstances. When choosing a tax attorney in your area, it is a good idea to research their expertise to make sure they have a history of representing businesses in cases similar to the one you may be facing.