How the IRS Addresses Unpaid Payroll Taxes

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Small business owners in distress over unpaid taxes may end up in your office, looking for information, guidance, and hope. The full breadth and range of tax problems keeping people awake at night is practically endless, but there is one issue that you will see again and again: unpaid payroll taxes. This is one of the most common reasons that businesses fall afoul of the IRS, and unfortunately, it is one of the most serious.

The IRS pursues this type of liability much earlier and much more aggressively than cases of unpaid personal income tax, and the consequences can be swift and severe.

Why Do Businesses Get Into Payroll Tax Trouble?
Payroll taxes, also known as employment taxes, are made up of three parts:

  • The federal income tax that employers are required to withhold from employees’ paychecks.
  • The federal Social Security and Medicare taxes that employers are required to withhold from employees’ paychecks.
  • The matching part of federal Social Security and Medicare taxes that employers are required to contribute.

These payroll taxes are called trust fund taxes by the IRS because the funds are held in trust, and that is the reason the IRS takes such a strong stand against nonpayment here. The IRS regards falling behind on filing and submitting payroll taxes as a type of theft, as the funds never belonged to the business in the first place.

For the average small business owner with cash-flow issues, making regular payments to the IRS can feel like a burden. When they are struggling to make ends meet during a downturn, it can be incredibly tempting to pay the rent or settle accounts with demanding creditors before paying the IRS. Filing late feels like a temporary loan to bridge a gap, and seems harmless, but the results are anything but.

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About Sam Brotman

Sam Brotman

Sam Brotman is a practicing attorney in San Diego and the founder of Brotman Law. His practice primarily centers on all aspects of tax litigation and criminal/civil tax controversies in front of the IRS, Franchise Tax Board, Employment Development Department, Board of Equalization, and various other state/local tax agencies. To learn more about Sam, visit his website or follow him on Facebook.

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