Penalties
for failure to pay the tax
There is a host of civil penalties for negligent or inadvertent
failure to make proper or timely payments and deposits of employment
taxes. For any willful failure to withhold or pay employment
taxes, both civil penalties and criminal sanctions may apply.
Perhaps
the most commonly encountered civil penalty is the Trust Fund
Recovery Penalty. This penalty is really a collection device,
in that it is equal to 100% of trust fund taxes that have not
been remitted to the Internal Revenue Service. Under this penalty,
a "responsible person" can be held fully responsible for any
willful failure to collect and pay trust fund taxes.
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Who
is a "responsible person" liable for the tax?
Briefly,
a "responsible person" is any person who has the duty to account
for, collect, and remit trust fund taxes. Generally, "responsible
persons" are the officers or employees of the company obligated
to remit withheld taxes. The corporate veil of liability protection
will not protect any responsible person - the IRS has the statutory
power to pierce the corporate veil and assess personal liability.
The
IRS has the burden of establishing who is a responsible person.
Once this is done, the burden shifts to that person to establish
that the failure to collect or remit employment taxes was not
"willful". "Willful" does not mean that the responsible person
acted with actual intent to defraud the government, but only
that that person knowingly failed to comply with statutory requirements.
Thus, if you are found to be a responsible person and you knowingly
used trust fund taxes to pay other creditors, you most likely
will have acted willfully.
Will
I be given notice of the IRS's intent to assess the penalty?
To
impose the Trust Fund Recovery Penalty, the IRS must provide
a 60-day notice to the person against whom it plans to assert
the penalty. The person receiving the notice can file an administrative
protest against application of the penalty during this period.
If
I failed to pay the tax, what are my options?
If
you have failed to collect or to pay trust fund or other employment
taxes you do have a few options:
1.
Pay in full. Assuming there is no criminal prosecution, you can,
of course, pay all outstanding taxes, penalties and interest in
full. The IRS generally just wants the money. It also might be
possible to abate the penalties for "reasonable cause."
2.
Pay over time. If you request an installment agreement, the Internal
Revenue Service will first carefully examine your books and records,
and you will have to submit a fairly detailed financial statement.
The time frame over which to pay the outstanding employment tax
obligation will most likely be short - and the IRS may require
that you liquidate assets to pay a portion of the obligation.
Moreover, you must be in compliance with current employment tax
obligations before the IRS will even consider such an installment
agreement.
3.
Offer-In-Compromise. An offer-in-compromise based on doubt as
to collectibility can be used to reduce or eliminate liability
for employment taxes. However, to qualify for an offer-in-compromise
based on doubt as to collectibility, the combined net value of
your assets and future earnings above base expenses must be less
than the outstanding liability. And the IRS will want the above-determined
amount to be paid in a lump sum or over time. Offers are most
effective when you have no assets or earnings. Thus, if you have
already lost your business (perhaps even gone through a bankruptcy),
an offer-in-compromise may be used to reduce or eliminate non-dischargeable
employment tax obligations.
4.
Bankruptcy. If you meet various statutes of limitation, it is
possible to discharge the non-trust fund portion of employment
taxes in bankruptcy. Again, only the employer's share of FICA
and FUTA can be discharged in bankruptcy. Trust fund taxes cannot
be discharged in bankruptcy. Bankruptcy can also be used to stave
off the collection activities of the IRS and to essentially force
the IRS to accept a payment plan. Thus, if you are faced with
the prospect of losing your business to the aggressive collection
efforts of the Internal Revenue Service, a Chapter 11 or Chapter
13 bankruptcy may be a viable option.
