What Happens if a Business Owes Payroll Taxes to the IRS?

December, 23 2024 by Kate Ferreira

Employer payroll tax liabilities refer to the various tax obligations that employers must meet concerning their employees' wages. These taxes include federal income tax withholding, Social Security and Medicare taxes (also known as FICA taxes), and federal unemployment taxes (FUTA). Employers are responsible for accurately calculating, withholding, and remitting these taxes to the IRS on behalf of their employees. Additionally, employers may have state and local payroll tax requirements, depending on the business's location. To verify reporting due dates, refer to the Employment tax due dates page on the IRS website.

Employers are responsible for depositing these funds to the IRS, and requirements for the deposits vary by employer. These requirements are based on the amount employment liabilities employers withhold and on their type of business. To ensure they are correctly depositing the funds, employers should be sure to check out IRS Publication 15 for all relevant information. Federal tax deposits must be made by electronic funds transfers (EFT) and payments can be made using the government’s free Electronic Federal Tax Payment System (EFTPS). The IRS lists additional methods to make payments, although they may charge a fee. These include:

• Asking your financial institution to initiate an automated clearing house (ACH) credit payment on your behalf.
• Asking a trusted third party, such as a tax professional or payroll service, to make the payment for you.
• Asking your financial institution to make a same-day tax wire payment for you.

The IRS treats payroll tax liability lapses as a very serious offense and makes it a priority within their enforcement wing to collect these amounts. If a business owes delinquent federal payroll taxes, the IRS may quickly assign a Revenue Officer to the case to investigate. More information on revenue officer case representation can be found here.

When an employer withholds and remits payroll taxes to the IRS, a portion of the taxes deposited are paid by the employer and a portion are withheld out of the employee’s gross wages. The taxes that are withheld from an employee’s gross wages and deposited by the employer on behalf of the employee are called trust fund taxes. Trust fund taxes consist of the employee’s share of Social Security and Medicare taxes, federal withholdings, and state and local tax withholdings, if required. When an employer is delinquent in remitting to the IRS the trust fund share of employment taxes, the IRS may assess a Trust Fund Recovery Penalty. The IRS will assess the Trust Fund penalties against any individuals that they deem as the responsible party for paying the payroll liabilities. Unfortunately, the IRS considers owners of the business as the responsible party, and may also assess key employees, which is anyone who has access to the accounts, or anyone who is aware of the liability as a responsible party.

If the IRS tries to assess a Trust Fund Penalty against an individual, this individual can dispute the penalty in IRS Appeals. However, if the responsible person does not prevail, they cannot petition Tax Court to review the IRS determination. IRS Trust Fund penalties can only be disputed through the IRS refund procedures - which means that at least a portion of the tax liability equal to one of the employees withholding amount needs to be paid. Once this amount has been paid, a request for refund can be filed with the IRS. If the IRS denies the request for the refund, then the next step would be to dispute the liability in Federal District Court.

We understand that this is not only a complicated process, but a stressful one as well. If you have a business and owe payroll taxes to the IRS, or currently have a Trust Fund Recovery Penalty being held against you for unpaid payroll taxes and would like support in navigating the process, we are here to help. Click here to learn more. You can sign up for a free tax debt relief consultation where one of our trained tax professionals will review your unique situation with you and answer any questions you might have.