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IRS & Unpaid Payroll Taxes; Businesses & CPAs Should be on Top of It

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IRS & Unpaid Payroll Taxes; Businesses & CPAs Should be on Top of It

Imagine a scenario where a small business owner drops in to your CPA firm looking for information guidance and hope over unpaid taxes. Though the holistic solution to tax problems has been successfully giving sleepless nights to business owners and their CPAs as their counterparts, unpaid payroll taxes is the main contributor. This is one of the prominent reasons why business owners and their CPA firms fall prey to IRS, and believe it or not – it is one of the most serious ones.

The IRS pursues these types of liabilities, more stringently, as compared to unpaid personal income tax, inviting more swift and severe consequences.

Why businesses get into Payroll tax troubles? Are their CPAs or the CPA firms, of no help?

Payroll taxes, aka employment taxes, comprise of three parts:

  1. Federal income tax, the one that you as a business or employer are required to withhold from employees’ paychecks.
  2. Federal social security and medicare taxes that you as an employer are required to withhold from employees’ paychecks.
  3. Matching part of federal social security and medicare taxes that you as an employer are required to contribute.

However; the IRS calls it as trust fund taxes, as the funds are held in trust, and may be that is the reason the IRS takes strong steps against the non-payment of it. IRS considers falling behind on filling and submitting payroll taxes, to be a type of theft, as these funds never belonged to the business in the first place. The heat is on for the CPA firms as well, because this becomes their duty to guide and update their customers. Business owners or as we address “the customers” outsource payroll services to CPA firms with a trust and to focus on their core areas of business expertise.

It would not be wrong to say that making regular payments to the IRS is like a burden for those average small business owners with cash flow issues. While they are struggling to make ends meet during a market meltdown, it is a really tempting easy way out to pay the rent or settle accounts with demanding creditors, instead of making payments of payroll taxes to the IRS. In such cases, either the business owners on their own or as guided by their CPAs, file these taxes with late fees. It might be a feel good factor in form of a loan to bridge the gap and seem harmless, but the outcome in longer run is anything but not harmless.

For active businesses, the IRS takes the failure to pay payroll taxes, very seriously and at times assigns field agents to stop businesses that accrue tax liability over more than two quarters; i.e. six months.

Consequences upon investigation

Considering unpaid payroll taxes to be one of the very serious violations, IRS will start sending reminder notices, when a business owner has missed out on paying a payment or two. But in most of the cases they do not wait for long, before they send across a revenue officer to the business in person – unannounced. This is the scenario where the business owner is give Form 9297, Summary of Taxpayer Contact, and Letter 1058, Final Notice of Intent to Levy and Notice of Your Right to a Hearing. Based on our experience of more than 2 decades, things will start to snowball pretty quickly after this.

Trust fund penalty assessment is the first action that IRS might initiate:

Upon initiation of this, it is not just that IRS will make attempts to collect the unpaid funds, but there are chances that they order investigation against the business and the people associated with that business, including the accountants, bookkeepers, CPAs, vendors and many more.

Alike other unpaid taxes, payroll taxes begin to collect penalties and interest, however; of all, the trust find penalty assessment is a special case. It equates to the amount of unpaid tax and crucially can be assessed not only against the company or the business for that fact, but also against anyone and everyone the IRS deems “responsible person”. This includes anyone, who has ever signed a paycheck or the one who could be considered to be aware of the workings of the business and willfully decided to withhold the payment of payroll taxes. It could be the business owner or even an involved accountant or CPA.

The trust fund penalty investigation can be a harrowing experience.

  • IRS issues an administrative summons to the bank accounts and copies of the business’ bank signature cards and copies of its canceled checks.
  • Often the revenue officer will try and get individuals to point the finger at different people, with the hopes of having multiple people to assess with a trust fund liability penalty.
  • The IRS revenue officers will usually conduct in-person interviews between different members of the company.
  • The IRS will then pursue those individuals and their individual assets, including bank accounts, liquid assets, and even the equity in their homes.
  • The signers may become targets, even if they were not decision-makers, and the problem is that the IRS takes a “guilty until proven innocent” stance.
  • It is up to the individual to prove that he or she should not be held liable.

Collection strategy:

IRS possesses legal rights to collect the unpaid payroll tax in almost any way it sees fit. The agency most likely will not accept any payment plans it believes it can collect the balance in full, and has the ability to shutter a business without a court order by levying the business operating accounts and liquidating assets. Followed with this, IRS can go for the personal assets and bank accounts of any individual deemed responsible and payroll tax debt is not dis-chargeable in bankruptcy.

Criminal proceedings:

Responsible business owners or individuals may end up getting themselves investigated with a federal felony, if the investigation suspects fraud. Being a business owner, you owe it to yourself to stay on top of these taxes to keep the IRS at bay with help of your CPA or the CPA firm.


Accounting and bookkeeping solutions for Certified Public Accounting firms, comprising of a wide range of accounting activities including bookkeeping, accounting, financial and payroll services, is what CPAs in order to match up to the pace, exactly need. These financial process outsourcing service providers are a team of efficient and enabled accounting professionals, with executional capabilities, delivery experience, project & account management skills backed up with adaptability and scalability, and are led by solution centric leadership team of CPAs and CAs.

About the Author:

Dr. Devaansh , with a career spanning over 17 years, has played a variety of senior roles in global business process solutions, accounting & taxation, financial planning, regulatory compliances, mergers & acquisitions, corporate policy designing, organizational restructuring, human resources set-up, business process re-engineering and many more. An expert at accounting, bookkeeping solutions, finances, international trade, international banking, strategic alliances, corporate strategy and legal areas, is also a visionary, who assists clients with operations in multiple economies, manage their overall accounting needs, financial planning and performance analysis reports of group organizations.


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