Undeposited IRS payroll taxes due to embezzlement: What Can You Do?


Finding out that someone you trusted has embezzled from you — there's really not much more of an awful feeling. You ask yourself "why did they feel like they were entitled to steal from you when you were so nice to them." Well, here's the thing. It happens. It happens a lot. And many people are too embarrassed to ever file a police report. Often times, many vendors and accounts payable who you thought were paid, weren't.  Now, as you try to recover from an emotional and financial nightmare, there's another thing to contend with: An IRS Revenue Officer.



So is there anything you can do but cry to the IRS after payroll tax embezzlement?

We would like to tell you a true story (yes, names and details have been changed) to show you what's possible.


Ron owned a modest furniture company in North Carolina. His bookkeeper, Glenda, was a high school friend and had worked for Ron since even before they graduated. Ron really considered Glenda to be part of his family. He trusted her instinctively. Every month, Ron would go over the bills with Glenda and make sure everyone was paid and she was on top of things. He always asked her about the payroll tax deposits, because in 1997, Ron had a cash flow problem caused by an accident at his factory. He learned that it is quite expensive to miss payroll tax deposits.


Little did Ron know, but Glenda started embezzling payroll taxes. Sure, the employees' net pay was paid — so his workforce was none-the-wiser. And yes, Ron even signed the 941 Forms Glenda prepared and actually filed. But Glenda was taking the approximately $35,000 in bi-weekly deposits and writing a check to herself and depositing them into her own personal account. That's called embezzlement.


The IRS notices about back payroll taxes go unseen

The IRS started sending notices. But Glenda always intercepted them. Every month, Glenda told Ron everything was great, there was plenty of money and all of the bills were paid. Ron, despite his best efforts, did not know he was being robbed blind.


Then on one Monday morning as Ron was attending to usual affairs, a call came from his secretary that there was a Mr. Hobbs from the IRS to see him. Ron's heart dropped, as this was rather unannounced. Ron went down to meet Mr. Hobbs, the entire time attempting to convince himself that his fears were unjustified. Ron has been a model taxpayer since 1997, after all.


They met in the conference room. Mr. Hobbs started rattling off a bunch of boilerplate language about IRS Publication 1, rights to a representation, etc. Ron couldn't figure out why this was going on. Finally, Mr. Hobbs, who identified himself as a Revenue Officer, handed Ron a bill that showed the business owed over $600,000. About half of that was penalties and interest. Ron called for Glenda.


Glenda was not in. "Can someone please find Glenda?" Ron asked. But Glenda was not in that day.


The employee embezzlement is discovered

The Revenue Officer left. Ron gave his CPA a call. "Ron", his CPA said, "I'm afraid Glenda has been embezzling from you all year long."


"Great", Ron replied, now numb. "But what am I going to do about the IRS? Can you help me?"


Ron's CPA told him he could try to make some calls, but suggested he try us here at IRSMedic. He knew we saved another one of his clients from a huge tax nightmare, and figured we could do the same for Ron.


Ron's CPA urges a payroll tax problem expert


We spoke to Ron and his CPA and they hired us. To shorten the story up a bit, this is what we were able to get the IRS to agree to: An Offer in Compromise in the low 5 figures. Why so low? Well, Ron's business didn't make all that much money. Ron's current payroll taxes were so high, along with other expenses, there really wasn't a lot left over for the IRS.


Usually, just getting a low Offer in Compromise for the business doesn't solve the problem as the IRS can assess a portion of the back payroll taxes against those who the IRS feels are willful and responsible for payroll taxes. In most cases, the owner of the business is the first person the IRS looks to assess this tax against personally. The IRS does this during the 4180 interview and will assess a Trust Fund Recovery Penalty.


To put it another way, is it really a great deal if the business gets an Offer in Compromise accepted if Ron now personally owes $350,000? How is Ron going to pay that $350,000? Yes, you can submit an Offer in Compromise on a Trust Fund Recovery penalty, but in this case, we did one better.


We asserted and documented that Ron had proved to the IRS, that despite his due diligence — that is — Ron wasn't negligent in his supervision of Glenda, Ron was neither willful nor responsible. And guess what? The IRS agreed and we avoided the entire Trust Fund Recovery Penalty being assessed against him! Ron paid a few thousand dollars to get this entire nightmare behind him.


Conclusion to Glenda's payroll tax embezzlement


A few months after this payroll tax problem nightmare was over, Ron told us he never got around to filing a police report against Glenda. He heard through friends she had a gambling problem. Ron could only think about her family. "It wouldn't do them any good for Glenda to get hit with a felony on top of that", he said.

Ron mentioned something else to me. He said "All these years I have been building a business that I thought was worth easily two million dollars. And you just proved to me it wasn't. And the IRS agreed. I guess I'm a bit sad to know all my hard work didn't really result in something I was counting on for my nest egg."


"Well, what are you going to do about it?" I asked.


"I'm going to expand", Ron replied. "I'd figure I'd have to take a loan out to pay the IRS. Now that I don't need to do that, I still am going to take a loan out. But now, I know the machinery I want to get and maybe my business will be worth millions in a few years." Ron added with a smirk, "Maybe I'll even set some money aside to hire more than one person to do my books."


Note: There are things that Ron did and we were able to prove why he wasn't willful. We offer no guarantee of similar results; we are just mentioning it is possible. There are other ways to settle back payroll taxes that might be appropriate in your case. If you would like to set up a free consultation with us to see if we can assist, contact us.