How Does the IRS Pursue Payroll Tax Collections?
Today, we will be discussing the ways in which the IRS pursues Payroll Tax Collections.
Payroll taxes represent both the employer and the employee portions of Social Security and Medicare taxes, along with Federal income taxes that are withheld from an employee's paycheck. The Internal Revenue Service takes an especially hard stance on the failure to remit payroll taxes, and uses aggressive collection efforts when pursuing these delinquent taxes.
The Trust Fund Recovery Penalty for Delinquent Taxes, also known as the TFRP or the "100% penalty" is not really a "penalty". Instead, it is a collection device use by the IRS to collect the trust fund portion of unpaid corporate payroll taxes from third parties.
The IRS has the power to assess the TFRP against any responsible persons who willfully fails to collect or pay trust fund taxes. A responsible person is anyone responsible for collecting and paying withheld taxes and payroll taxes. It usually includes corporate officers, and owners, but occasionally can also include members of the board of directors, and even third parties such as CPAs.
Assessing the penalty against individuals serves several purposes. First, if the business collapses, the IRS can still recover the TFRP from the responsible persons. Second, individuals are also more incentivized to submit the proper payroll taxes because they know they might be personally liable for the penalty.
Once the TFRP is assessed against an individual, the IRS can take all of its usual collection actions against their personal assets, such as bank account levies, wage garnishments, or federal tax liens. This gives the IRS even more collection options, as there may be several responsible persons to collect from.
How the IRS Collects from Businesses:
Businesses typically have profits that can be used to satisfy tax debt, along with assets that can be seized to pay off payroll tax debt. While individuals can avoid some collection actions if it would seriously interfere with their standard of living, the IRS does not have to worry about such considerations when collecting from a business. The TFRP also cannot be discharged in bankruptcy, no matter how old the tax liability is, unlike some other taxes.
If your business has delinquent payroll tax debt, you should consult with a tax attorney to determine whether you are personally responsible for the TFRP. You may have to separately consider both your business's tax liability, as well as how to protect your personal assets from seizure or other collection actions. Consult with a tax controversy attorney to determine how to protect both your business and personal assets from IRS collections.