If you have unpaid payroll taxes or other issues being looked into by the IRS, Advanced Tax Solutions can provide valuable advice on how to proceed. One of the first things to understand about the personal payroll tax liability is the Trust Fund portion of the Tax.  If you are a Corporation (including S Corporations) or LLC you may have protection from personal liability from creditors.  Unfortunately, the IRS has a means around this protection and can come after you personally for any Trust Fund amounts.

What  is the Trust Fund and How Does it Work? 

The Trust Fund portion of a payroll tax is the amount the employer has withheld from an employee’s pay.  Specifically it is the Federal Income Tax withheld from the employee, as well as the employee’s portion of Social Security and Medicare that is withheld. 100% of the federal withholding is withheld from a paycheck and only half of the Social Security and Medicare is withheld.

The other half of the Social Security and Medicare is a tax paid by the employer.  Only the half withheld for Social Security, Medicare, and the 100% federal withholding is Trust Fund.   The IRS can go after the corporation for 100% of the entire liability, which consists of the Trust Fund portion (1/2 SS and MC, and 100% of Fed W/H), as well as the employer’s half of the Social Security and Medicare, and all penalties and interest that has accrued as well.

The IRS can only go after the responsible party for the Trust Fund portion of the tax and penalties are very steep for a payroll tax liability.

Who is a “Responsible Party” in the Eyes of the IRS?

The responsible party is anyone the IRS can link to the underpayment or nonpayment of the payroll taxes.  This includes:

  • Owners
  • Managers
  • Bookkeepers
  • Anyone connected to the Corporation the IRS can show had influence on the underpayment or nonpayment of the payroll taxes.

The IRS can name multiple people as responsible parties.  The IRS can issue the same $27,500 penalty several times.  It is not divided up.  The IRS penalizes everyone they can, but only collects it once.  If the Corporation has three owners, a bookkeeper, and a manager who were all issued the penalty, the IRS could collect as much as they can from EACH person until a total of $27,500 was paid.

If the IRS receives full payment from the bookkeeper, or one of the owners, it would then be up to that person to get reimbursed by the other responsible parties for whatever share they should have paid.  The IRS can use all collection actions against the corporation and the responsible parties.  These collection actions can include bank levies, wage garnishments, and asset seizures.

How Does the IRS Determine Who The “Responsible Party” is?

The IRS conducts an interview (generally called a 4180 interview, named after the form the IRS uses to conduct the interview.) They use this interview and form to gain information about the Corporation. This information is then used to assess the penalty against the responsible party.

What Do I Do If the IRS Wants to Interview Me?

A 4180 interview with the IRS is very high risk and it is critical to understand the process.  Advanced Tax Solutions always coach people on the questions the IRS is going to ask.  Advanced Tax Solutions coaching will help potential responsible parties avoid giving an answer that is unnecessarily damning.  To clarify, we never recommend lying to the IRS, but sometimes the IRS’s questions are slanted. If you do not understand the ramifications of the questions it may lead you down a bad path.

If you have more questions about personal liability in payroll tax issues contact Advanced Tax Solutions today.