Hanover Employment Tax and Trust Fund Recovery Penalty
Employment taxes imposed and collected by the Internal Revenue Service and state taxing authorities differ from most other types of taxes. Also known as payroll taxes, there are frequently two components: (1) amounts owed by the employer and (2) amounts owed by the employee. While the amount owed by the employer is collected in a similar manner to other business taxes, the employee’s share is withheld from their wages by the employer. The employer collects that portion on behalf of the taxing authority and is required to pay it over on behalf of the employee. That portion – also known as a “trust fund tax” – does not belong to the employer but is instead temporarily held in trust for the taxing authority. Income tax withholding and one-half of Social Security and Medicare taxes are generally trust fund taxes. If an employer fails to timely pay employment taxes, there can be serious repercussions for owners or operators of the business, including criminal and civil penalties. If you or your business have failed to timely file or pay employment taxes, you should contact the professionals at Crepeau Mourges to evaluate your options.
Failure to Pay Trust Fund Taxes
For many labor-intensive businesses, employment taxes can be a significant expense. During tough times, some businesses look to these payments as a slush fund to pay other expenses; problems can quickly escalate out of control, particularly if business conditions deteriorate. Due to the size and speed of this increasing problem and since this money is held on behalf of the employee, the Internal Revenue Service considers this a significant problem worthy of significant enforcement efforts. On top of the manpower and technology used to quickly root out these problems, the Internal Revenue Service and state agencies are armed with significant ability to assess and collect the taxes and associated penalties.
Failure to promptly file and pay employment taxes can result in significant delinquencies. In addition, unlike other taxes, the Internal Revenue Service assesses an additional penalty for failure to deposit these taxes in a timely manner. Failure to deposit penalties apply at 2% of the tax for one day of lateness and can increase to 10% more deposits that are 15 days or more late. When the amounts escalate quickly, the taxing authorities will act quickly to protect its ability to collect by filing a Notice of Federal Tax Lien (“NFTL”). As a public filing, an NFTL can significantly impair the ability to obtain credit and can exacerbate mounting business problems. The Internal Revenue Service also acts quickly to identify assets to collect from and can levy on those assets. Many revenue officers are less likely to make collection accommodations related to these taxes – such as by releasing the NFTL or delaying levy action – as they often signal significant impairment of the ability to repay ongoing business expenses.
Trust Fund Recovery Penalty
On top of penalties and more aggressive tactics, employment taxes also have another distinguishing characteristic from most other taxes: a portion can be collected from individuals, not just from the business itself. In many situations, if there is a significant balance due, revenue officers will examine and try to assess the “trust fund recovery penalty” against those that are responsible. Anyone actively involved in the payroll process – whether an owner, corporate officer, bookkeeper, manager or otherwise – can quickly become an alternative option to collect the “trust fund taxes” owed to the Internal Revenue Service. (Most state taxing authorities have analogous mechanisms to collect state-level trust fund taxes, which include withholding taxes and sales and use taxes.) If assessed with the trust fund recovery penalty, those individuals become jointly and severally liable for the entire amount assessed. Revenue officers will pursue collection from those individuals with the same vigor as used to collect from the business and can continue with collection action even if the business is dissolved.
If a business falls behind on its employment taxes and is contacted by a revenue officer, competent counsel should be contacted immediately. The professionals at Crepeau Mourges are focused, capable, and willing to help. We can advocate on behalf of the business and those involved in order to avoid the assessment of the trust fund recovery penalty. If those affected have interests adverse to one another, we can adjust our strategy accordingly and can make a referral for other competent counsel. Frequently, our strategy will involve the demonstration of the operation of the business or that certain individuals did not have control over financial decisions. We have also avoided assessment of the penalty by showing that certain individuals are not a viable source of collection. If necessary, we can advise on how to structure future operations or tax payments to minimize collateral damage. These strategies can help to avoid further aggravating an already bad situation.
Worker Classification
In recent years, the Internal Revenue Service and state taxing authorities have increased their scrutiny of worker classification issues. Whether done to avoid taxes or not, treating workers as independent contractors rather than as employees can substantially reduce taxes for businesses. If selected for an employment tax audit – either randomly or after receipt of a Form SS-8 (Determination of Worker Status) from a worker – any worker classification issues will likely be examined. Even if the employer has a sound basis for the classification, taxing authorities generally presume that an employment arrangement exists or will find enough factors of behavioral or financial “control” to warrant such a finding. Negative results can result in significant assessments, lead to parallel investigations by other taxing authorities for other taxes, and devastate a business.
Crepeau Mourges has significant experience handling worker classification issues. We are well-versed in the different tests applied by the various taxing authorities in this context – from the 20-factor test to the “ABC” test, and other control tests. When issues are identified prior to the audit, we can help to provide an understanding of the tests and employ a strategy to strengthen defense in the event of an audit. We can also advise on the available compliance programs, such as the Voluntary Classification Settlement Program. If an audit is imminent, Crepeau Mourges will advocate on your behalf. Previously, we have successfully argued for complete relief pursuant to Section 530 and have obtained a favorable resolution through the Classification Settlement Program. Our goal is to not only minimize the impact of the worker classification issue in the context of that particular audit but also to minimize the impact on other potential audits or lawsuits.
Criminal Tax Representation
For those dealing with high-dollar employment tax delinquencies, where “pyramiding” of liabilities may have occurred, where workers are intentionally misclassified, or in similar circumstances, there is a realistic possibility of a criminal tax referral. Prosecutors have a number of criminal statutes at their disposal, from tax evasion to failure to file, to failure to collect, and others. These crimes carry significant potential penalties and, since the tax loss generated in employment tax matters is typically high, outcomes frequently are worse than those in income taxes. Prosecutors highlight the large tax gap caused by these issues and the significant need for a general deterrent effect.
In these types of matters, it is imperative to have a seasoned veteran like those at Crepeau Mourges at your back. We have represented clients under criminal prosecution in employment tax matters and have achieved favorable results under the circumstances. As with other criminal tax defenses, we will thoroughly investigate the facts, present viable defenses, and mitigating facts, and advocate for the government to decline prosecution or agree to pursue less significant charges or penalties.
Get Help from a Payroll Tax Attorney
Employment tax problems should not be taken lightly. If you have such a problem, you should consult with a legal professional experienced in payroll tax matters. Penalties can increase for those who think going it alone and making costly missteps. If you own or operate a business in Maryland, Pennsylvania, Washington, D.C., or Florida and you have an employment tax issue, contact Crepeau Mourges to discuss how we can help. We will work tirelessly to reach a comprehensive solution that meets your satisfaction.
