Are You Behind on Payroll Taxes? Beware of the Consequences: How the IRS Addresses Unpaid Payroll Taxes

Many small business owners may be in distress over unpaid taxes. They are looking for information, guidance, and hope. The full breadth and range of tax problems keeping people awake at night is practically endless, but there is one issue that I see again and again: unpaid payroll taxes. This is one of the most common reasons that businesses (of any size) are in trouble with the IRS, and unfortunately, it is one of the most serious.

The IRS pursues this type of liability much earlier and much more aggressively than cases of unpaid personal income tax (or unpaid business income tax), and the consequences can be swift and severe. Unpaid payroll taxes can affect more than just the business owner(s) - it can hit just about everyone in the business that has check signing authority - the owner(s), partners, managers, supervisors, and even payroll clerks

Why Do Businesses Get Into Payroll Tax Trouble?

Payroll taxes, also known as employment taxes, are made up of three parts:

• The federal income tax that employers are required to withhold from employees' paychecks;
• The federal Social Security and Medicare taxes that employers are required to withhold from employees' paychecks; and
• The matching part of federal Social Security and Medicare taxes that employers are required to contribute.

These payroll taxes are called trust fund taxes by the IRS because the funds are held in trust, and that is the reason the IRS takes such a strong stand against nonpayment here. The IRS regards falling behind on filing and submitting payroll taxes as a type of theft, as the funds never belonged to the business in the first place.

For the average small business owner with cash-flow issues, making regular payments to the IRS can feel like a burden. When they are struggling to make ends meet during a downturn, it can be incredibly tempting to pay the rent or settle accounts with demanding creditors before paying the IRS. Filing late feels like a temporary loan to bridge a gap, and seems harmless, but the results are anything but.

Note: The IRS takes failure to pay payroll taxes, especially with respect to active businesses, very seriously and often assigns field agents to stop businesses that accrue payroll tax liability over more than two quarters.

Investigation and Consequences

The IRS considers unpaid payroll taxes a very serious violation. The agency will send out reminder notices once a business has missed a payment or two, but it may not wait long before it sends a revenue officer out to the business in person, unannounced. This is when the business owner will probably be given Form 9297, Summary of Taxpayer Contact, and Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing. Things can start to snowball pretty quickly after that.

The following are three actions the IRS could take:

Trust fund penalty assessments. The IRS will not only be attempting to collect the unpaid funds, but it is also likely to be launching an investigation against the business and the people associated with that business: the trust fund penalty investigation.

Like all unpaid taxes, payroll taxes begin to collect penalties and interest, but the trust fund penalty is a special case. It is equal to the amount of the unpaid tax, and crucially, it can be assessed not only against the company, but against anyone who the IRS determines is a “responsible person.” This can be anyone who has ever signed a paycheck or who could be considered to have knowledge of the workings of the business and willfully decided to withhold payment. It could be the business owner or even an involved accountant or CPA.

The trust fund penalty investigation is a harrowing experience: The IRS issues an administrative summons to the bank accounts and copies of the business’ bank signature cards and copies of its canceled checks. The signers may become targets, even if they were not decision-makers, and the problem is that the IRS takes a “guilty until proven innocent” stance. It is up to the individual to prove that he or she should not be held liable.

Note: The IRS revenue officers will usually conduct in-person interviews between different members of the company. Often the revenue officer will try and get individuals to point the finger at different people, with the hopes of having multiple people to assess with a trust fund liability penalty. The IRS will then pursue those individuals and their individual assets, including bank accounts, liquid assets, and even the equity in their homes.

Collection tactics. The IRS has the legal right to collect the unpaid payroll tax in almost any way it sees fit. The agency is not likely to accept payment plans if it believes it can collect the balance in full, and it has the ability to shutter a business without a court order through levying the business’ operating account and to liquidate assets. The IRS can go after the personal assets and bank accounts of any individual deemed responsible, and payroll tax debt is not dischargeable in bankruptcy.

Criminal proceedings. Responsible individuals can also find themselves investigated for and charged with a federal felony, if the investigation uncovers suspected fraud.

As you can see, the IRS pulls no punches when pursuing unpaid payroll taxes. If you are a business owner, you owe it to yourself to stay on top of these taxes to keep the IRS at bay.

About the author:

Sam Brotman is a practicing attorney in San Diego and the founder of Brotman Law. His practice primarily centers on all aspects of tax...

NOTE: I took the liberty to make a few small changes to the text at the beginning of this article in order to make the article more relevant to my readers. Other than those few changes, the remainder of the article is unchanged from the original article as written by Sam Brotman and published on the accountingWEB website on June 10, 2016.

How to Barter Without Getting Audited

As a child, I always found it odd when I’d answer the door and in front of me stood a white-haired man in ripped jeans and a dirt-laden T-shirt holding a carton of straight-from-the-farm eggs. This would happen every few months. Turns out, my dad, a physician, was in a barter agreement with this man, a local farmer. A check-up equaled a dozen eggs, and sometimes a squash or carrot thrown in as an extra special treat.

The act of trading goods and services may be as old as time, but it is spiking in popularity as of late.

“Bartering is getting really big right now because people don’t have cash,” says Carolann Jacobs, president of Vivid Epiphany, a business coaching consultancy based in Plano, Texas.

So let's say you are a dentist and your dog needs walking. You trade services, don’t exchange money, and the deal is done, no strings attached, right?

Wrong.

“Not reporting your barter income can easily lead to an audit by the IRS,” says Roger C. Sims, a CPA in Carrollton, Texas.

Here’s how to avoid an audit:

Document everything

Barter agreements work the same way as cash agreements, Sims explains, and need to be documented in kind.

“Report your barter income on your tax return and label it ‘barter revenue,’” he recommends. “Full disclosure is always best. Your barter income is taxable. Make sure to report what you would have received in cash.”

For example, if Sims bartered $100 worth of his CPA services for $100 worth of window washing for his office, he would need to report $100 to the IRS because that is the amount he would have been paid if the transaction wasn’t a barter.

“Report your barter income on your revenue line,” he advises.

Make it legal

In addition to reporting barter income on your tax return, Sims advises business owners to create legal documents for each barter transaction.

“Create a document that explains the barter agreement and then make sure both parties sign that document,” he says.

Hire an outside firm

Fortunately, there is help for small business owners who don’t know whom to barter with and/or want to avoid a dreaded call from the IRS. Companies such as ITEX help to initiate what is called ‘modern barter exchanges.’

“Our members do business with each other, but they use ITEX dollars instead of cash,” explains Jeff Weaver, membership development director for ITEX in Dallas. “We collect a transaction fee on their sales and purchases.”

While direct barters can often be accidental and result in uneven exchanges ($200 of dentist work for $50 of window cleaning), modern barter companies help eliminate discrepancies and keep transactions legit with the IRS.

“Someone usually gets screwed in an informal barter situation,” Weaver says. “We help facilitate the process in an easy way.”

Other modern barter exchange companies include IMS, Barter Network and BizXchange.

Get informed

Perhaps the best way to protect your company from a barter-induced audit is to know the facts.

Great resources include the IRS Tax Requirements for Barter Exchanges, National Association of Trade Exchanges and International Reciprocal Trade Association.

Katie Morell is Chicago-based writer and frequent OPEN Forum contributor. She regularly contributes business, feature and travel articles to national and regional publications.

Employee vs. Independent Contractor – Ten Tips for Business Owners

IRS Summertime Tax Tip 2009-20

If you are a small business owner, whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them.

Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.

1. Three characteristics are used by the IRS to determine the relationship between businesses and workers: Behavioral Control, Financial Control, and the Type of Relationship.

2. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.

3. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job.

4. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

5. If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.

6. If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result -- then your workers are probably independent contractors.

7. Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties for failing to pay employment taxes and for failing to file required tax forms.

8. Workers can avoid higher tax bills and lost benefits if they know their proper status.

9. Both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding – with the IRS.

10. You can learn more about the critical determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, Publication 1779, Independent Contractor or Employee, and Publication 1976, Do You Qualify for Relief under Section 530? These publications and Form SS-8 are available on the IRS Web site or by calling the IRS at 800-829-3676 (800-TAX-FORM).