Let's suppose there is someone who has a business. He has several employees. While the business owner makes sure there is enough money in the payroll account to pay the employees net pay, he doesn't actually make the deposits for the employees' withholdings. That is, their check stubs show an amount the employer withheld and forwarded to the IRS. But the employer doesn't actually forward the money to the IRS. Rather, the employer pockets the money, or more than likely uses the money for other business purposes because cash flow is tight.
Can you be liable for unpaid taxes even if you aren't the employer?
The answer is yes. Here are two examples:
- If the IRS deems you to be a "responsible person" at the business. If the IRS feels you had some control over what bills are paid, they will assess these unpaid withholdings as a tax bill against you personally. An IRS Revenue Officer typically looks at whether or not you were a signatory on the employer's bank account. If yes, expect the Revenue Officer to assess the tax against you. Yet, this is not always the rule. If you were a signatory there are many ways to stop the IRS from assessing the tax bill against you. You have to be prepared to show you weren't the one calling the shots, and then there is no reason for the IRS to assess this tax against you.
- If you are married to the employer and you file jointly with the employer. This is a real nasty surprise. If you file jointly with your spouse the IRS will assess the unpaid withholdings as a tax against your spouse; but get this, will seek to collect against you if the debt is not paid. IRS Levies and liens can be filed against you. Even though you had no knowledge of the the unpaid tax, even if you had no control, even if you didn't receive any profits from the business.
There are solutions to getting rid your spouses — or that of someone else — unpaid payroll taxes
In the case where you are not married to the employer but are about to be assessed (or were assessed), you'll want to have a strong lawyer on your side. They will have to know how to properly push back against the bill an IRS Revenue Officer, and perhaps the employer, want to stick on you. This assessment can be challenged before or after it has actually been levied against you. If you were fired for standing up for yourself, that would be a serious violation of employment laws.
In the case where it is your spouse who ran up the payroll tax bill on the employees' withholding, you would think there was an easy solution. Simply amend your returns so that instead of filing jointly, you file separately, right? While that would be a nice, simple straightforward solution, remember that we're dealing with the IRS. Although they allow you to amend returns from separate to filing jointly, they do not allow you to sever your filing status by amending your return filing status from joint to separate.
You may be entitled to some type of innocent spouse relief (equitable relief, split-tax relief included). If you do qualify this would remove the unpaid payroll taxes from your "account" with the IRS. They would then seek to collect the unpaid taxes from your spouse only (innocent spouse relief is also available for regular income taxes too). Also, some good news – you don't actually have to be divorced for all types of relief (although it helps).
Unpaid employees' withholding can be settled with an offer in compromise
If you are unsuccessful in getting the IRS to remove (or not to assess) the tax liabilities of someone else, you can always try to see if an offer in compromise would settle it. If you have significant assets or income, the IRS will be looking for a big piece of your pie. Such a solution is not as optimal as not owing the tax in the first place, or having it removed because it should not have been assessed against you.
If you need assistance with a payroll issue, or any tax issue, contact us to schedule a free, confidential consultation.
Technical Notes: Unpaid employees withholding is assessed through the Trust Fund Recovery Penalty mechanism. It is known by many as 6672 (the section of the code that authorized the TFRP), and also CIV PEN, which stands for Civil Penalty. A TFRP is assessed during a 4180 interview with the IRS, or if you file jointly with an assessed party.