Payroll Tax Debt and Your Personal Liability

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The IRS has new enforcement tools. Make sure you’re up to speed.

As a business owner, you have countless things on your mind, from inventory to long-term growth planning. But your personal liability is most likely what keeps you up at night. Depending on the structure of your business and the nature of the goods or services you sell, your personal liability will vary. Here, we’ll take a closer look at personal liability related to payroll tax debts. 

Given the new enforcement rules in place to help the Internal Revenue Service (IRS) collect on payroll tax debts, business owners are at greater risk of being held personally liable for overdue funds. In short, it is important to stay up to speed with IRS policies and to know when you are at risk. 

Payroll tax debts can lead to escalating (and expensive) problems. While the IRS treats all federal tax problems seriously, payroll tax debts are often treated with a heavy hand. 

Following, are a few things to understand about the IRS and its commitment to issues related to payroll tax debt. The more you know about these issues and your personal liability, the better prepared you will be to manage, or even avoid, unwanted attention from the IRS.



1. Understand the Big Picture for the IRS

Just as you understand the big picture for your business—you know your target market and have a good idea where to find them—so too, does the IRS understand who it is after with respect to payroll tax debt. 

In the United States, employers must withhold federal income taxes from employee salaries or wages. These deductions will appear on employee W2 forms and social security documents. Each business is responsible for submitting these taxes on a timely basis to the government. 

If a business fails to submit withheld payroll taxes—as indicated on employee W2 forms— to the government, alarm bells sound at the IRS. The government quickly has all the information it needs to come after its target market, in pursuit of payroll tax debt.



2. See How Payroll Tax Debt Equates to Theft

Once you understand that payroll tax debt equates to theft, you’ll know why the IRS acts so swiftly on this issue. Employment taxes, withheld in trust, constitute over 70% of all revenue collected by the IRS. In short, the government has a significant interest in protecting this source of income. 

On discovering your business has withheld federal taxes, but not paid them to the government, the IRS will not hesitate to react with a heavy hand. In fact, both the IRS and the Department of Justice consider these actions to be “theft of payroll tax trust funds”, which may make you criminally liable. 

If charged with this form of payroll tax theft, you could face prosecution and possibly even jail time. In short, you can be held personally liable for payroll tax debt, which can have far-reaching effects on you and your business.  



3. Know That the IRS Has New Enforcement Tools 

Given that employment taxes make up the majority of IRS revenue, it is not surprising that the government guards these funds so closely. The IRS has introduced several new enforcement tools to help it find and collect money it is due. As you consider your own payroll tax debt, it is important to be aware of these changes.  

First, the IRS has specifically trained Revenue officers to trace trust funds used for personal gain by business owners. These investigations will be assessed for tax fraud penalties and referred for criminal enforcement. In other words, the IRS is training its staff to actively pursue cases of payroll tax debt that could result in criminal charges.    

Second, the IRS will forcefully accelerate the use of court orders of “civil injunctions”, referring the Department of Justice to institute a civil lawsuit. As a result, a business guilty of withholding payroll taxes for its own use would be forced to close or potentially have criminal prosecution sought against it.  

Finally, it’s important to know the IRS is accelerating its use of Artificial Intelligence (AI) and data analytics, in order to quickly identify who is behind on payroll taxes. This real-time analysis gives the IRS an easy snapshot of which businesses have payroll tax debt. From there, they can decide which businesses to pursue with penalties and charges. 



4. Be Aware of Your Role

If your business is behind on making payments of withheld taxes to the government—if it has payroll tax debt—you may wonder what your personal liability is in the matter. It is a sound question, given the potential consequences.

From the perspective of the IRS, the answer is simple. If you own the business, if you are an officer or an employee with knowledge and authority over the financial affairs of the business (such as an accountant or bookkeeper), you can be held personally liable for payroll tax debt. You and the business can face financial penalties; you can even face criminal charges.

The IRS hopes that when you, as a business owner or key player, have a personal stake in payroll taxes being submitted, you will be more likely to act with integrity and submit your payments regularly. In other words, the IRS is willing to use criminal charges to ensure you fulfill your obligation to pay these taxes. 



5. Help Your Business Succeed

Of course, not every missed payment to the government is intentional. Mistakes happen in any business. Human error is the cause of many tax problems for small businesses. Unfortunately, simple miscalculations can be penalized as if you had paid the taxes late on purpose. 

To set your business up for success, make sure you have a system of checks and balances in place, as well as a team of trusted tax and payroll professionals. Where possible, automate processes that can help you submit government payments. In other words, build a system that has financial integrity built-in and removes the opportunity for human error. 



6. If You’re Already Behind – Find the Right Team to Help

If your business is already in arrears—if you have payroll tax debt and need help figuring out your next steps—it’s critical to find an experienced tax planning team that can help you navigate proceedings with the IRS.


Working with tax experts can help you with a wide range of complex tax problems, from payroll tax debt to tax liens, delinquent taxes, tax relief or an Offer in Compromise. A qualified team can review your situation in depth and help you manage situations where personal liability is at stake. In other words, they can deliver peace of mind and attention to detail. 


At Franskoviak Tax Solutions, we have helped our clients with tax planning for more than 30 years. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach. Speak to our team about personal and business taxes, payroll taxes, IRS tax relief and tax problems such as IRS tax notifications, payroll tax debt, delinquent taxes and more.


Start with a free consultation—we’re here to help you get ahead of payroll tax debt to help you reduce personal liability. 


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