A Texas physician lent $100,000 to one of his businesses to cover its payroll taxes and got nailed with a $4.3 million IRS penalty. Lending to a business is complex. In this case, an employee had embezzled the money. Kevin Thompson, CPA says “the first mistake this man made was making the loan and paying the taxes without including the IRS in this process. Perhaps, he was unaware of the magnitude of the debt.”
The court concluded that the physician was responsible and acted in a willful manner. You can still be considered “willful” even if you don’t have an evil motive or intent as in the case of employee embezzlement. Thompson says, “it’s almost evil how onerous and vindictive the IRS penalty structure has become.”
The physician’s business had to shut down operations and remit its remaining receivables to pay the IRS penalty. No matter what the employee did, the owner was responsible. “The IRS justifies this closure by saying that the taxpayer was a bad business owner,” says Thompson.
The IRS gets aggressive when it comes to payroll taxes and some people can face imprisonment when they aren’t paid. The agency is being encouraged to prosecute more payroll violations because it is trust fund money that belongs to the government. The charge is serious.
The IRS doesn’t consider using the money to pay suppliers or to keep the business from closing as a good reason to avoid paying payroll taxes. A payroll service will make sure that an employer doesn’t use the funds inappropriately, but there is still the chance the service may take the money.
It’s important to make sure the payroll service is reputable. If there is a shortfall, the IRS will make personal assessments on everyone who is “responsible” and that includes owners or signatories of the company and its payables. It can assess a Trust Fund Recovery Assessment (100-percent penalty) against everyone who is responsible.
You assume liability even if you have no knowledge that the IRS hasn’t been paid and IRS can go after you personally. The penalty equals the taxes that haven’t been collected. It can also be assessed against all responsible persons to see who comes up with the money first. Thompson says “this is the scariest part of the whole transaction. That Doctor was supposed to know that problem. And the Doctor may have acted like he was in an emergency room – stop the bleeding and then deal with the cause. Unfortunately, as he discovered he tried putting a Band-Aid on a severed limb.”
When all responsible parties face tax bills, they usually try to deflect the blame to someone else. Sometimes one person ends up paying the entire amount while the others pay nothing. Meanwhile, the IRS will still attempt to collect from the company that has withheld on the wages.
To make sure it doesn’t happen again, the IRS may try to shut the company down so the problem doesn’t get worse. It may also seek criminal penalties. However, in most cases, it will seek an injunction to make sure the agency gets its money back and to prevent the company from pyramiding. (going deeper and deeper into debt.)
If a company is only paying back what they owe at a minimal rate, the IRS may try to enforce compliance. The DOJ will seek an injunction to ensure timely deposits and payments of all employment taxes that were withheld and to file all employment tax returns in a timely manner.
Thompson says “payroll and payroll taxes are a serious matter with the Department of the Treasury. Under no circumstances should you fall behind and if you are, get the IRS and your tax attorney involved immediately. Your CPA may be necessary to unravel all of the intricacies of this case but remember that your conversations with your CPA are not confidential or protected.”
It’s important that as a business owner you avoid this type of situation. Make sure to get help as soon as possible and stay abreast of your payroll taxes. Hire a payroll service that will not allow you to use the payroll tax money for anything other than to pay the tax.
Contact your tax preparer for any questions you have regarding this matter.