To help employers stay current with their employment tax responsibilities, the IRS announced on Dec. 8, 2015, a new early initiative to notify employers who may be falling behind on payment of their employment taxes. IRS News Release (IR-2015-136) Early Interaction Initiative for Employer Payroll Taxes.
One of the more serious tax offenses is committed by employers who, in addition to failing to pay their portion of employment taxes, fail to account for and pay over to the government income and FICA taxes that they have withheld from their employees – the so-called trust fund taxes. A common fact pattern involves an employer who is short on cash using the withheld taxes to fund operations with the expectation that that the employment taxes will be fully paid the following month when cash flow improves. The problem often is that the cash flow does not improve and the employer finds itself with a significant tax liability. This pattern can quickly spiral out of control. To make matters worse, the “responsible persons” of the employer (who can be officers, directors and shareholders) are jointly and severally personally liable for the withheld taxes that were not paid over to the government. This can even result in jail time for responsible persons. See Failure to Pay Over Payroll Taxes Could Land You in Jail, Failure to Pay Over Payroll Taxes Could Land You in Jail - The Sequel, and Failure to Pay Over Payroll Taxes Could Land You in Jail - Part III.
The new IRS initiative is designed to help employers by seeking to identify employers who appear to be falling behind on their tax payments even before the employment tax returns (Form 941) are filed. Although employment tax returns usually are filed quarterly, many employers make deposits of employment taxes more frequently than quarterly. Under the new initiative, the IRS will monitor deposit patterns and identify employers whose payments decline or are late. Employers identified under the initiative may be contacted by the IRS. The IRS intends to offer helpful information and guidance through letters, automated phone messages, other communications and, in some instances, a visit from an IRS revenue officer.
Clearly, the IRS wants employers to know that it is watching. This is not necessarily a bad thing. Many employers do not appreciate the severe financial consequences of not paying over to the government the trust fund taxes, not to mention potential jail time. Including the personal liability of the responsible persons for the trust fund taxes, which, among other things, can result in the loss through foreclosure of a responsible person’s house, trust fund taxes are not discharged in bankruptcy. Thus, if the failure of a business results in the bankruptcy of its owner, the owner’s liability for the trust fund taxes will remain after the bankruptcy. Early contact by the IRS may help employers avoid these consequences.