Avoid IRS Collections: Perfect Your Payroll Tax Deduction Advice

Clients need strong advice: Don’t use the IRS as a bank

Payroll taxes are the leading reason why small and medium size businesses get hauled in to the Internal Revenue Service’s (IRS) Collection Division. That won’t be changing any time soon: The IRS has recently affirmed that payroll taxes are a priority, meaning that tax pros need to learn how to avoid trouble and resolve payroll tax issues.

Part of the key to avoiding trouble is understanding how the IRS assesses businesses and their owners, says tax attorney Eric Green. Green outlines the IRS’ procedure for determining responsibility for and the calculating of unpaid payroll taxes in his Eli Financial webinar, “Payroll Taxes: Make Proper Withholdings and Avoid IRS Collections.”

Spotlight on: Cash-Strapped Business Owners

The IRS is more than happy to share stories of snagging those who failed to collect and pass on payroll taxes. Actions from fiscal year 2016 include:

  • A New Jersey man who hired illegal immigrants;
  • A Pennsylvania man sentenced for tax fraud; and
  • Numerous business owners who withheld the tax but did not pay it to the government.

Actions from 2017 were similar.

As attorney Stephen Fishman explains on Nolo, all businesses with employees are required to pay to the IRS:

  • A 12.4 percent social security tax (up to an annual ceiling)
  • A 2.9 percent Medicare tax (more for high earners)

“Employers are required to withhold half of the Social Security and Medicare taxes from their employees’ paychecks and pay the other half out of their own pockets,” Fishman wrote. “The money is supposed to be sent to the IRS or an authorized financial institution, usually monthly or semi-weekly.”

Reasons for evasion—and subsequent payroll tax violations—include cash-starved businesses that try to use the IRS as a bank and others who collect money with no plan to ever pass it on. Still others are “tax protestors” who think federal taxes are unconstitutional.

Penalties Include Fines, Prison

There are good reasons to avoid IRS collection actions, writes CPA Vani Murthy in a Journal of Accountacy article.

“The penalties for failing to pay over trust fund taxes can be severe and sometimes include prison time,” Murthy says.

Furthermore, the IRS and courts cast a broad net when determining who is responsible for paying taxes: A supervisor who hands the job off to an employee who shirks the duty may find herself in hot water, too.

“It is important for taxpayers to understand that the IRS is aggressive in assessing the trust fund penalty,” Murthy adds. “The government does not take this lightly and will not relent in its efforts to collect the amounts it is owed. For a business with numerous employees, unpaid trust fund taxes add up quickly, and the trust fund penalty consequently assessed against a responsible person can be huge. In addition, the penalty is not dischargeable in bankruptcy.”

With this in mind, says Green, accountants and tax pros should understand clearly how the payroll tax collection process works so clients can be properly advised—and deterred from taking missteps.

To join the conference or see a replay, order a DVD or transcript, or read more

Jeff Schmerker

Jeff has extensive professional experience writing on a variety of topics, from pharmaceutical research to environmental history. He has published more than a half-dozen books, and he has worked as a newspaper reporter, magazine editor and restaurant reviewer. He lives in Missoula, Montana with his wife and son.

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