According to a recent report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS should allocate more resources to combat the increase in egregious employment tax noncompliance.
When a business has employees it is required to file employment tax returns, typically federal Form 941, Employer’s Quarterly Federal Tax Returns. The Form 941 tax return reflects not only the employee’s portion of FICA and Medicare taxes but also, and more importantly, the employer’s share of FICA and Medicare taxes along with income taxes that are withheld from their paychecks.
The withheld portion of the income taxes and the FICA and Medicare taxes belongs to the employees who earned it and not to the employer. The employer is supposed to take the taxes it withholds from its employees and send it to the government. When a business is underfunded or is having trouble, it often stops filing Form 941 tax returns and sending the related taxes to the government, preferring to use that money to keep its doors open.
When a business has unpaid tax liability, the IRS seeks to collect the unpaid tax liability, plus penalties and interest, from the business. If the business cannot pay the liability fast enough or not at all, the IRS then looks to the owners, the officers and shareholders of a business to pay the unpaid Trust Fund portion of the liability and may seek to assert the Trust Fund Recovery Penalty against those individuals.
In this fashion, the government expands its ability to collect not only from the business, but also from the people who own and operate the business. TIGTA’s report noted that there was a 38% decline in the IRS’ assertion of the Trust Fund Recovery Penalty against business owners when compared with the same period five years earlier, largely because of the reduction in the number of IRS Revenue Officers.
TIGTA recommended that the IRS improve its efforts to combat employment tax noncompliance and to send egregious cases to the IRS Criminal Investigation Division for criminal prosecution, which is the bad news. The good news, at least for delinquent businesses, is that the IRS is reluctant to send more cases for criminal prosecution because of its reduced workforce and because of the limited number of criminal tax cases that can be prosecuted by U.S. Attorneys. However, and in response to the report, the IRS has agreed to develop a more focused strategy to combat egregious employment tax compliance problems.
Do you own a business with unpaid tax liability due to the IRS or the Illinois Department of Revenue or have unfiled tax returns? Contact us, we can help.