As a small business owner, you know you are required to withhold payroll taxes from your employees’ pay checks, hold onto the taxes and pay them to the government. But what happens when you have an unexpected business expense, and no money to cover it? You might consider “borrowing” the money from the withheld payroll taxes account, with every intention to pay it back. But what if business doesn’t pick up as you’d hoped and you aren’t able to cover the money you “borrowed” when it’s time to pay the taxes to the federal government?
If you find yourself in this situation, and the IRS has audited your business and found missing payroll taxes, you might be wondering what this means. The money you set aside from payroll taxes is called trust fund taxes, because the government trusts you to hold onto it and pay them on behalf of your employees. The IRS can assess a Trust Fund Recovery Penalty, which can be hefty for a business already struggling to pay bills.
How much is the Trust Fund Recovery Penalty?
The penalty the IRS could assess is typically equal to the amount of unpaid payroll taxes your business was responsible for paying. Not only does this mean you still need to come up with the amount of unpaid taxes, but you have to come up with double that amount to also pay the penalty. An experienced tax law attorney can help assess your specific situation and offer guidance on how to handle the penalty. It is especially helpful to find a tax law attorney who is also a CPA (certified public accountant) since they would have knowledge on your entire situation of filing taxes correctly to avoid penalties and audits.
What can I do if an IRS audit shows I failed to pay payroll taxes?
When the IRS discovers you failed to pay payroll taxes and wants to assess the Trust Fund Recovery Penalty, you would get a letter from the IRS if you were the person responsible for taking care of the trust fund taxes. The letter gives you 60 days to appeal the proposed Trust Fund Recovery Penalty. If you don’t exercise your appeal rights or respond to the letter, the IRS will assess the penalty against you and send you a letter demanding payment. Once the IRS assesses the penalty, they are allowed to take collection action of your assets through liens, a levy or seizure.
So what can you do if you find yourself in this situation? As soon as you receive a letter like this from the IRS, contact an experienced tax law attorney who can discuss your options with you, before it gets to the point of potentially losing your personal assets. Not only do you have appeal rights, but you can also show the IRS that either you were not the person responsible for the payroll taxes, or you did not willfully neglect to pay the payroll taxes. If you made the mistake of borrowing from the payroll taxes account, you still have legal rights and options when it comes to defending yourself against the IRS. It is important to seek the help of an experienced attorney who can not only protect you in this situation, but can help protect your business that you worked hard to build.