Who is liable for unpaid IRS payroll taxes?

And before you say "the business" think again. The law regarding who becomes liable for unpaid payroll taxes makes a bit of sense, but only after you understand the entire landscape. Read this article to learn more.


First, clarification on exactly what IRS payroll taxes are: The employees' portion


The IRS considers payroll taxes to be made up of two parts. The first part is the employee's federal income taxes that the employer is supposed to withhold and forward to the IRS. Additionally, along with the federal income taxes that are withheld, the employer is under a duty to also withhold the employees' share of Medicare and Social Security taxes and make deposits according to the deposit schedule as determined by the IRS.


The employees' total withholdings are what is refereed to as the Trust Fund amount of payroll taxes. The IRS seeks to hold anyone who is willful AND responsible for repayment. Personally. This assessment is done by an IRS Revenue Officer through something called Trust Fund Recovery Penalty (TRFP) Assessment, Form 4180 interview.



Aside from being called a TFRP, sometimes you will see it as CIV PEN, which stands for Civil Penalty, 6672 which stands for the part of the code where the law comes from —  26 USC 6672. But it's all the same thing.


Misconceptions about TFRP willfulness and responsibility.

Now just because you are the business owner, it does not automatically mean you should be personally responsible. Employee embezzlement is a common fact pattern where a TFRP may not be assessed against a business owner.


Other examples of improper TFRP assessment are when there are many owners to a business. One business owner who has access to the funds decides to pay other bills rather than the IRS. In that case, while a TFRP may be appropriate against one partner, it may not be appropriate against another.


It is important to know — the IRS is fine assessing the TFRP against as many people as possible, yet people less willful and less responsible may wind up paying the bill. Therefore, if you really don't think you are responsible, it is important you get someone to represent you, even if it may create tension between you and a liable party. There is no merit in agreeing to be hit with a TFRP when you know you should are not willful nor responsible, as you may be the one who winds up paying 100% of the bill.

Just because you are not the owner, just because you did not embezzle, does not mean the IRS won't try to assess the TFRP against you. For instance, many Revenue Officers will simply asses the TFRP against anyone who is a signatory on the bank accounts. Since these grounds alone are insufficient, there must be more facts than being a mere signatory.


The other part of payroll taxes: The employers' portion


Employers are responsible to pay half of medicare and social security taxes. So what happens when these aren't paid? Instead of making a personal assessment against anyone who is willful or responsible, the IRS can only look to the actual business for recovery of these taxes.


If you are in an installment agreement to repay the IRS payroll taxes in full, you will wind up paying all of the taxes, including the employers' portion. If however, you qualify for an Offer in Compromise for unpaid payroll taxes, you may be able to avoid repaying the employers' portion. Aside from an Offer in Compromise, other was to reduce or structure back payroll taxes are other payroll tax settlement options, with partial payment installment agreements, hardship status or even shutting the business down and buying back the assets at auction value, and giving the auction value to a Revenue Officer.


Payroll Tax Negotiations can be tricky

Because of the numerous moving parts, the wild swings in cash flow a business may have, and the stress of a business under attack, payroll taxes are really the most difficulty types of IRS tax debts to negotiate successfully, yet it can be done. If you need assistance, contact us. We can help.