IRS Focuses On Questionable Employment Payroll Tax Practices While Raising Awareness Of Potential Payroll Tax Schemes

The Tax Resolution Institute has seen how quickly payroll tax problems can take down a once thriving business. As a result, we try to build awareness of the potential bad practices with payroll tax administration that can lead to problems. The Internal Revenue Service issued a consumer alert that covered a variety of schemes where federal payroll taxes are not properly withheld or paid by employers from their employees’ paychecks. If you hit this link, the ENTIRE ARTICLE which is summarized below can be read in full at the IRS.gov website, a first-class resource for tax questions and issues.

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There are many reasons employers choose not to withhold or pay payroll taxes. For some, it may be an attempt to use the government as a bank to ‘borrow the money for a short while’ with good intentions to pay it back later. For others, it may be a situation where an employer collects the taxes and elects to keep it during a period of financial difficulty rather than pay it to the IRS. For a small number, it involves philosophical differences with the tax law of the United States that courts consistently reject. Regardless of the reason, federal law requires employment tax withholding and payment by employers.

Payroll taxes consist of federal income tax withholding along with Social Security and Medicare taxes and unemployment taxes. Also, many states have withholding requirements for various employment related taxes, such as contributions to a worker’s compensation fund. Improper reporting or payment of payroll taxes affects the ease with which employees can claim future benefits from these programs.

The IRS takes a variety of steps to combat payroll tax non-compliance. The agency has a number of civil actions it can take like audits and filing tax liens against property the taxpayer owns. In addition to civil actions, IRS Criminal Investigation investigates and refers for prosecution individuals and businesses that have willfully attempted to avoid filing and paying payroll taxes. These efforts have led to significant criminal convictions resulting in incarceration and fines. The IRS urges all businesses to resist the temptation to become involved in or victimized by unlawful activities in regards to payroll taxes.

Payroll Tax Schemes Will Be Uncovered By The IRS

The 4 Most Common Types of Payroll Tax Non-Compliance Include:

1) Misclassifying Employment Status — Sometimes employers incorrectly treat employees as independent contractors to avoid paying payroll taxes. Generally if the payer has the right to control what work will be done and how it will be done, the worker is an employee. Employers who misclassify employees as independent contractors (and are not eligible for relief under Section 530 of the Revenue Act of 1978) will be liable for the payroll taxes on wages paid to the misclassified worker and subject to penalties. If you have taken such action, contact the tax experts at the Tax Resolution Institute today.

2) Paying Employees in Cash — Paying employees in whole or partially in cash is a common method of evading income and payroll taxes. There is nothing wrong with compensating an employee in cash, but payroll taxes are owed regardless of how the employees are paid. And the IRS will build its case using all available information even if there are no payroll records or checks.

3) Pyramiding — “Pyramiding” of payroll taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. An often cause is a lack of profit or capital for operating costs, so the business owner uses the trust funds to pay other liabilities. The quarterly payroll tax liabilities accumulate (or “pyramid”) until the employer has little hope of catching up. Businesses involved in pyramiding frequently shut down or file for bankruptcy and then start a new business under a different name starting the cycle over.

4) Unreliable Third Party Payers — There are two primary categories of third party payers – Payroll Service Providers and Professional Employer Organizations. Payroll Service Providers typically perform services for employers such as filing payroll tax returns and making payroll tax payments. Professional Employer Organizations offer employee leasing meaning that they handle administrative, personnel, and payroll accounting functions for employees who have been leased to other companies that use their services. Many of these companies provide outstanding services to employers. Unfortunately, in some instances, such companies have failed to pay over to the IRS the collected payroll taxes. Employers are urged to exercise due diligence in selecting and monitoring a third party payer. When choosing a third party payer, employers should look for one that is reputable and uses the Electronic Federal Tax Payment System (EFTPS). This allows the business owner to verify payments made on their behalf.

Employers must report payroll taxes withheld from their employees on Form 941, Employer’s Quarterly Federal Tax Return. Employers are also responsible for filing Form 940, Employer’s Annual Federal Unemployment Tax Return. Payment of payroll taxes must be made to an authorized bank or financial institution according to federal tax deposit requirements.

If you are having problems with your payroll taxes or your company has been caught up in one of the above bad practices, please contact the Tax Resolution Institute so we can offer Tax Resolution Services and a possible answer to your payroll tax problem today.