If you are a business owner and have employees, you are required by law to withhold tax from your employees and to pay those funds to the IRS when required to do so by law. The tax withheld from employees includes all of their income tax and one-half of their FICA and Medicare taxes. These funds are reported on the employer’s quarterly federal Form 941 tax return along with the other one-half of FICA and Medicare tax that is required to be paid by the employer.
But what happens when the employer does not pay the withheld funds to the IRS? In that event, the business now has an unpaid tax liability due to the IRS, including penalties and interest. The IRS will then ask the business for payment on a voluntary basis. If the payment is not forthcoming, then the IRS ultimately takes enforced collection action against the business, including levying on its businesses bank accounts, its credit card processor and its accounts receivable.
The IRS can also propose to assert the withheld portion of the unpaid liability against the owner(s), officer(s) and shareholder(s) of the business under the Trust Fund Recovery Penalty. Failing to file a tax return is a misdemeanor, punishable by up to one year in jail. However, someone who willfully fails to collect, truthfully account for and pay over withholding tax can be found guilty of a felony, punishment of which can include imprisonment for a period of greater than one year. In the past, the IRS has prosecuted only a handful of individuals for failing to collect and pay over withholding tax.
More recently, however, the IRS and the United States Department of Justice are now vigorously pursuing employment tax violations and are referring more cases for criminal prosecution. The government has always used criminal prosecution to achieve two goals, the first of which is to punish the person that the government feels should be punished, and the second of which is to scare the heck out of everybody else into complying with their legal duties under the tax law which is, essentially, a deterrent effect.
Do you have unpaid employment tax liability due to the IRS? Contact us, we can help.