Payroll taxes and temptation, part 1: consequences for not paying

"I can resist everything except temptation," quipped the flamboyant Victorian poet Oscar Wilde.

To be sure, you may feel you have more ability to resist your particular temptations than Wilde had to resist his.

But if you are a business owner who is tempted to dip into payroll taxes withheld from employees to cover cashflow problems in your business, you may need a reminder of the reasons to resist. In this two-part post, we will discuss why it is so important to do so.

Why is employment tax compliance often so challenging for business owners?

In part employment taxes are challenging because of the administrative burden of handling them. This involves calculating how much has to withhold from employees and then paying it over to the IRS at appropriate times.

There is also the burden of paying the employer share of Social Security and Medicare taxes.

But the real problem is often the fact if your business runs into severe cash flow problems, it can seem like you are merely loaning money to the business by temporarily tapping into money withheld from employees for payroll taxes.

What can happen when a business owner doesn't handle employment taxes properly?

You could not only face a civil tax penalty if you do this. Even worse, you could face an investigation for possible tax fraud or tax evasion.

The IRS could also seek to recover from you personally through the Trust Fund Recovery Penalty. We wrote that in our April 20 post.

These consequences can result even if you only thought you were loaning money to the business that was supposed to go to payroll taxes.

Does the IRS have any programs to help businesses that have fallen out of compliance with payroll tax obligations?

Yes. The IRS now has a program whereby a taxpayer who has fallen behind on payroll taxes is supposed to get a "903 Letter" for each unpaid quarter. This letter does not in itself impose criminal consequences. But it puts the taxpayer on notice of a delinquency that could result in criminal investigation.

The IRS is also working to set up a system to flag unpaid employment taxes sooner. This system is called the Electronic Tax Payment System (EFTPS).


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