For anyone with employees, paying employment taxes is inevitable. You withhold taxes from employee pay, and send the money to the IRS. The taxes are withheld from wages and are supposed to be promptly paid to the government. This is trust fund money that belongs to the government, and no matter how good a reason the employer has for using the money for something else, the IRS is strict. If you are in business, it can be tempting to figure that you have to keep the rent paid and supplies ordered, and that the IRS won’t miss the payroll tax money if you just divert it temporarily. You never want to become delinquent in paying taxes, especially employment taxes. The IRS is vigorous in going after these payroll taxes.
No matter how good the reason for using the money to keep the business afloat, the practice is dangerous. It is one reason that in cases where the IRS catches the problem early, the IRS will encourage use of a payroll service. If the payroll service automatically takes out and remits all the payroll taxes, the business won’t have the discretion to divert the money, even briefly. When a tax shortfall occurs, the IRS will usually make personal assessments against all responsible persons who have ownership in or signature authority over the company and its payables. The IRS can assess a Trust Fund Recovery Assessment, also known as a 100-percent penalty, against every “responsible person” under Section 6672(a).
You can be liable even if have no knowledge the IRS is not being paid. If you’re a responsible person the IRS can pursue you personally for payroll taxes if the company fails to pay. The 100% penalty equals the taxes not collected. The penalty can be assessed against multiple responsible persons, allowing IRS to pursue them all to see who coughs up the money first. “Responsible” means officers, directors, and anyone who makes decisions about who to pay or has check signing authority.
When multiple owners and signatories all face tax bills, they generally do their best to direct the IRS to someone else. Factual nuances matter in this kind of mud-wrestling, but so do legal maneuvering and just plain savvy. One responsible person may get stuck, while another may pay nothing. Meanwhile, the government will still try to collect from the company that withheld on the wages. And those IRS collection efforts can be serious.
The IRS can move to collect, too, including via a levy on your bank accounts. But before a levy can be issued the IRS must provide notice and an opportunity for an administrative Collection Due Process hearing. A Collection Due Process hearing is only available for certain serious IRS collection notices. Among other things, it allows you the opportunity to ask for an installment agreement, an offer in compromise or another collection alternative. There are special rules in the case of a predecessor employer. That is, this procedural safeguard won’t apply if you are a predecessor employer. Here’s what the IRS evaluates to determine if one business is a predecessor of another:
- Does it have substantially the same owners and officers?
- Are the same individuals actively involved in running the business, regardless of whether they are officially listed as the owners/shareholders/officers?
- If the taxpayer’s owners or shareholders are different, is there evidence they acquired the business in an arm’s-length transaction for fair market value?
- Does the business provide substantially the same products, services, or functions as the prior business?
- Does the business have substantially the same customers as the prior business?
- Does the business have substantially the same assets as the prior business?
- Does the business have the same location/telephone number/fax number, etc. as the prior business? See IRC Section 6330(h).
- A business won’t be treated as a predecessor if there was a genuine change in control and ownership, as where the business was acquired in an arm’s-length transaction for fair market value, where the previous owners have ceased all involvement.The IRS’s guidance lists examples of predecessor status and explains how to determine if a business requesting a Collection Due Process hearing for employment taxes is a “predecessor.” There’s no right to a Collection Due Process hearing to resolve the employment tax liabilities if you already had your chance.