If you own a business or businesses and have payroll taxes (federal income tax, FICA and Medicare tax) withheld from employees' paychecks but have not paid the money over to the government, you may be in for a surprise. Especially if you owe these taxes for multiple quarters or owe unpaid payroll taxes that total over $100,000, you could find yourself being criminally prosecuted by the U.S. instead of having the I.R.S. pursue you through civil administrative channels for collection as you may be used to them doing in the past.
Generally, if your business owed unpaid payroll taxes in the past, the I.R.S. has done an investigation to find out who the "responsible persons" were, and then assessed the "trust fund recovery" or TFR penalty against them.
It's not really a penalty but a collection tool, to make the individual owners of the business personally responsible for the amounts deducted from employees' paychecks, including the federal income tax withheld from the employees' pay and the social security and Medicare deducted from the employees' pay, that was not paid over to the government. This TFR penalty is under the Internal Revenue Code, 26 U.S.C. Sec. 6672.
This amount is then assessed against the individual owners, officers, or other responsible persons, and the I.R.S. starts collection against their individually owned assets and/or income. If you can prove that you had no control over the business's bill paying, you may be able to show that the TFR penalty should not be assessed against you. But the I.R.S. casts a wide net, and if you were a signatory on the company's bank accounts or if you paid other creditors after the I.R.S. tax debt arose, you may be found liable for the TFR penalty.
From now on, the I.R.S. will put an increased effort into prosecuting such responsible persons under 26 U.S.C. Sec. 7202, which states:
Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $10,000, or imprisoned not more than 5 years, or both, together with the costs of prosecution. (Aug. 16, 1954, ch. 736, 68A Stat. 851.)
My recommendation: always withhold and pay over to the government all required payroll taxes. If you fail to do it, and you are determined to be a responsible person, you may not only be facing the imposition of the Trust Fund Recover Penalty, but you could find yourself being criminally prosecuted by the United States and doing serious time in one of their federal prisons.
I told a client and his wife about this recently at my Houston, Texas law office and they were totally shocked. "Not paying over I.R.S. payroll taxes is a crime?" Yes, and the large amounts that they owe could lead to a stiff prison sentence. I think they will take this more seriously from now on; this is not like being in default on a credit card debt or a bank loan. This is literally stealing money from the U.S.A. If you owe a lot of these taxes, I would resolve the matter civilly as soon as you can.
If you can pay it outright, find the money and do so. You can designate voluntary payments to pay the "trust fund" portion of the taxes owed. Or if you can't pay in full at one time, get representation from an attorney such as myself, or an experienced CPA or Enrolled Agent, and enter into an Installment Agreement or Offer in Compromise. Because if you wait for the I.R.S. to come to you, in the current environment they may bring a gold badge and a pair of handcuffs with them.
Any questions or comments? Do you think this new push towards criminal prosecution by the IRS is justified? Please leave your questions or comments below.