If you are doing internal bookkeeping for a client and notice he is falling behind on his payroll tax payments, beware. In two separate meetings within a week’s time this author heard IRS managers tell of a $59 billion (yes, billion) shortfall in collection of 941 employment taxes. Along with this astounding number, they told of enhanced efforts for early intervention, and increased crackdown on repeat offenders.
In 2014, over 70% of IRS revenue collection was from funds withheld by employers.1 Thus, when employers do not turn over these funds for a myriad of reasons, the Government’s budget takes a serious hit. In its effort to “do more with less” the IRS is implementing new measures to try to prevent pyramiding of these unpaid taxes.
The IRS is guided by its own rules as laid out in the Internal Revenue Manual (IRM). IRM 5.7.1 deals with federal tax deposit (FTD) alerts. It states: “Federal Tax Deposit (FTD) Alerts are used to determine an employer’s compliance with employment tax deposit requirements for the quarter of the Alert issuance, and for subsequent quarters until the taxpayer is brought into full compliance. The FTD Alert process identifies, at an early stage (i.e., before the return is due), taxpayers who have fallen behind in their deposits.”2
A project implemented in April, 2015 by the IRS is in place to determine whether contacting the taxpayer even earlier when a deposit is missed increases the chances of future compliance. Currently, the FTD Alert analysis is done in the twelfth cycle week of each quarter, in March, June, September, and December. FTD Alerts are sent directly to the Integrated Collection System (ICS) for direct assignment to the field and are supposed to be assigned to a revenue field collection officer within seven days. The revenue officer is to contact the delinquent taxpayer within 14 days.3
In 2016, the IRS hopes to implement a new system that will identify almost immediately changes in FTDs by taxpayers, and trigger an alert. The premise is to “stop the bleeding” as soon as possible. In its struggle to collect unpaid taxes with depleted IRS staff resources, the goal is to increase compliance in the payroll tax area, and ultimately, increase revenue. In addition, compliance levels the playing field for corporations, particularly smaller ones. Taking an illegal loan from the government, i.e., not paying over -withheld taxes, puts compliant taxpayers at an unfair disadvantage in any competitive market.
Another focus during the early intervention process is to be sure the taxpayers are aware of the personal exposure for unpaid withheld taxes. Internal Revenue Code §6672 imposes a penalty on any person the IRS deems “responsible” for non-payment of these taxes. The IRS will cast a wide net in looking for anyone who had control over a corporation’s finances, and chose to pay other obligations, leaving taxes unpaid.
These issues arise even when a taxpayer uses a third party payroll provider or accounting firm for services such as return preparation and federal tax deposits. There have been cases when third party payroll services have stolen from taxpayers, filed false tax returns, and made insufficient deposits. Even in such cases, corporate owners and officers have been held liable for non-payment of taxes.4 The 8th Circuit opined: “It is no excuse, precluding liability of responsible persons for failure to pay over employment taxes, that, as a matter of sound business judgment, money was paid to suppliers and for wages in order to keep the corporation operating as a going concern.”5
Corporations, including accounting firms, have also been held liable for nonpayment of withholding taxes. An accounting firm that had the authority to pay its client’s monthly bills, had a signature stamp of the client’s treasurer and president, and provided financial advice was found to be “responsible” for non-payment of withholding taxes.6 The fact that the accounting firm had to review its disbursements with the client’s Board every month was not a defense to its control over which bills were paid, and which were not. The firm knew that employment taxes were not paid, and the Court found that it “made voluntary, conscious and intentional decisions to prefer other creditors over the Internal Revenue Service.”7 It was liable for the unpaid withholding taxes.
It is also noteworthy that the U.S. Department of Justice, Tax Division, is focusing efforts on non-compliant taxpayers in federal court filings. It may pursue civil remedies including judgments and injunctions, as well as criminal prosecution for failure to turn over the collected taxes.8
In summary, in the current climate of stretched IRS resources, it is looking to where collection efforts will be most effective, and the area of unpaid employment taxes is its target. Clients/taxpayers who are cutting corners in this area should be aware of this focus, and make every attempt to stay compliant, or risk being quickly shut down. Likewise, anyone involved in the financial aspects of their client’s business should take precautions to assure they are not a part of any decision to neglect a corporation’s tax obligations.
Kathleen M. Lach is a Partner in the Tax and Litigation Departments of Arnstein & Lehr LLP. She represents clients before a variety of different tax authorities, including the Internal Revenue Service, the Illinois Department of Revenue, and the Illinois Department of Employment Security.
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1 This information was taken from the power point presentation by IRS management to the Chicago Bar Association on February 1, 2016.
2 IRM 5.7.1.1
3 IRM 5.7.1.4
4 See, for example, Rocha v. U.S., 142 F. Supp. 2d 1277; 87 A.F.T.R.2d 2001-1661 (D. Or. 2001).
5 Honey v. U.S., 963 F.2d 1083 (8th Cir., 1982).
6 Quattrone Accountants, Inc. v IRS, 895 F.2d 921 (CA3 Pa, 1990,)
7 Quattrone, at 928.
8 See U.S. Department of Justice Tax Division website, “Employment Tax Enforcement”
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