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Payroll Taxes

Who is Responsible for Unpaid Payroll Taxes?

When a business employs people, they become responsible for employment taxes in two ways. First, the business must withhold part of an employee’s wages in order to pay income taxes, Social Security taxes, and Medicare taxes. These payroll taxes are referred to as trust fund taxes because the business holds the money in trust until making a payment to the government. Second, the business must pay taxes as well, including a matching contribution to Social Security and Medicare.

Unfortunately, businesses do not always remit these funds right away for a variety of reasons. If the taxes are not readily available when they are due to the IRS, the agency must be able to recover them in some way. In order to collect the taxes it’s due, the IRS will subject responsible parties of the business to the Trust Fund Recovery Penalty (TFRP) as outlined in Internal Revenue Manual 5.17.7.

Who is Liable for Unpaid Payroll Taxes?

If the business does not have funds or assets available for the IRS to collect (regardless of whether the business is still in operation or not), the IRS must hold someone accountable for the taxes due. To determine who is subject to the TFRP, the IRS uses  two tests, responsibility and willfulness.

  • Responsibility is present if an individual is in charge of collecting, accounting for, and paying employment taxes.
  • Willfulness is present if the same individual failed to collect, account for, or pay employment taxes “voluntarily, consciously, and intentionally.”

Responsible parties can include partners, directors, officers, shareholders, trustees, board members, employees, payroll service providers, and more. The person’s title does not matter; rather, the IRS is looking for the individual whose job it was to ensure these taxes were taken care of properly. Every situation is different, and the IRS may even determine that multiple people were responsible for collecting, accounting for, and paying these taxes. This person or people should have been aware of their responsibility and failed to acknowledge or act on it. Even if there was no bad motive, the IRS can determine their negligence was willful. In fact, “using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

Personal Liability for Payroll Taxes

An individual or individuals found to be both responsible and willful in their disregard for employment taxes may be personally subject to the TFRP, which is equal to the unpaid income taxes withheld and the employee’s portion of the Social Security and Medicare withheld. If you find yourself in this situation, it is time to contact a tax resolution professional. You only have 60 days to appeal the decision. If you fail to take action within these 60 days, the IRS can and will use your personal assets to recover the back taxes, even using aggressive collection techniques such as a lien or levy.

In extreme cases (generally involving using payroll taxes for personal gains), unpaid payroll taxes may lead to criminal charges. While this is happening with greater frequency in recent years, most cases do not result in criminal proceedings.

Contact Us 

You deserve the best in IRS tax representation, tax preparation, and tax planning services. At East Coast Tax Consulting Group, you’ll work with a licensed CPA who will handle your case from beginning to end. We invite you to contact our team to schedule a free, confidential consultation.