Payroll Tax Problems

Internal Revenue Service (IRS) Convicts Business Owner of Failure to Pay Payroll Taxes

April 4, 2008 | by Dennis N. Brager

A jury found a Colorado man guilty of failure to pay federal payroll taxes pursuant to IRC § 7202 and of filing false payroll tax returns pursuant to IRC § 7206(1). He was, however, acquitted of charges of tax evasion. Failure to pay IRS payroll taxes carries a penalty of up to 5 years in prison, and/or a $10,000 fine per count. Filing false tax returns, including false payroll tax returns carries a penalty of not more than 3 years in federal prison, and/or a $100,000 fine per count.

Like all employers Crabbe was required to file payroll tax returns, and to withhold income income taxes, social security taxes and Medicare taxes from employee paychecks, and to pay those amounts over to the IRS. When he failed to do so he exposed himself to both criminal tax liability, and to the trust fund recovery penalty (TFRP) as well. Once Crabbe has been sentenced it is likely the IRS will go after him to pay the unpaid payroll taxes. In general, responsible corporate officers who willfully fail to pay payroll taxes become personal liable pursuant to IRC § 6672 to pay those taxes. While many business owners get stuck paying corporate payroll taxes out of their own pocket, not too many go to jail for failure to pay. Nevertheless the case is a reminder that in appropriate situations the IRS can and does criminally prosecute people for failure to pay.

If you have payroll tax problems contact the tax attorneys at Brager Tax Law Group.

California Employment Development Department (EDD) and Internal Revenue (IRS) to Collaborate

February 21, 2008 | by Dennis N. Brager

The California Employment Development Department (EDD) announced that it will be exchanging payroll tax information with the Internal Revenue Service (IRS) . The EDD is the state agency which includes in its duties making sure that employers withhold and payover state payroll taxes. The EDD programs include payroll tax audits of business owners to make sure that all workers who have been treated as independent contractors are truly independent contractors, and not employees. In determining whether workers are properly classified the EDD sometimes relies on the 20 factor test set forth by the IRS in Rev. Proc. 87-41. It also relies on a 9 factor test set forth in the California Supreme Court case set forth in Tieberg v. California Unemployment Insurance Appeals Board (1970), 2 Cal. 3d 943 P. 2d 975; 88 Cal. Rptr. 175. The factors listed are:

1) Whether or not the one employed is engaged in a distinct occupation or business;

(2) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of a principal or by a specialist without supervision;

Trust Fund Recovery Penalty (TFRP) Deadlines Shortened by Internal Revenue Service (IRS)

January 26, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) ( has reversed its previous lenient policy of allowing the IRS Appeals Division to consider untimely protests of the Trust Fund Recovery Penalty (TFRP). First, what is a trust fund recovery penalty? Actually, its not really a penalty. It’s simply a collection tool that the IRS uses to collect payroll taxes owed by corporations. Under Internal Revenue Code § 6672 the IRS may collect the trust fund portion of the taxes owed by a company from so-called responsible officers who willfully fail to collect or pay over payroll taxes.

The TFRP used to be known as the 100 per cent penalty, but the name probably created too much confusion so it was changed. Before the TFRP can be collected from an individual the IRS must issue a 60 day letter, allowing for a tax appeal to the IRS Appeals Division. In the past IRS procedures provided that even if a protest was filed late it would be forwarded to the Appeals Division for review. See IRM 5.7.6.1.6(5) (04-13-2006)

The IRS has issued an internal memorandum which provides that if the tax appeal is not filed in a timely manner than the case will not be heard. It’s definitely not the kinder gentler IRS.

Internal Revenue Service (IRS) Payroll Taxes Collected from Sole Member of LLC

January 25, 2008 | by Dennis N. Brager

Small businesses which get behind on their debts also often fail to pay their payroll taxes resulting in payroll tax problems for the owners. Not paying payroll taxes is a big mistake since the Internal Revenue Service (IRS) can collect the trust fund portion of the payroll tax debt from responsible officers of a corporation under Internal Revenue Code § 6672. Not all corporate shareholders , however, are necessarily persons liable for trust fund taxes under Internal Revenue Code § 6672. For example, if the payroll tax problems were concealed from the owner he might not be personally liable. Some tax lawyers may have thought that an LLC would provide similar protection for its members, but that’s not always true.

According to the Second Circuit Court of Appeals in New York that’s not the case for a sole member of an LLC. McNamee v. IRS, 488 F. 3d 100 (2nd Circuit 2007). McNamee, who was apparently an accountant (I don’t know whether he was a CPA), represented himself in court, and didn’t have a tax lawyer. McNamee was the sole member of a limited liability company formed under Connecticut state law. Like most states, Connecticut provides that a member of a single owner LLC is generally not liable for its debts.

IRS regulations allow single-owner limited liability company to choose whether to be treated as a corporation–or to be disregarded as a separate entity. If an LLC elects to be treated as a corporation the owner is subject to double taxation–once at the corporate level and once at the individual shareholder level. On the other hand, the LLC may chooses not to be treated as a corporation, either by affirmative election or by the failure to make any election. In the later instance IRS regulations provide that the LLC is disregarded, and that the member is fully liable not just for the trust fund taxes, but all the payroll taxes including interest and penalties accrued on the overdue payroll taxes. The Second Circuit Court of Appeals found that the IRS regulations were valid, and in so doing hit McNamee personally with a large tax debt.

Wrongful Levy Claim Instructions Provided by Internal Revenue Service (“IRS”)

January 22, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has provided new instructions for persons who wish to file wrongful levy claims against the IRS pursuant to Internal Revenue Code § 6343(b). These instructions are set forth in IRS Publication 4528 (Rev. Nov. 2007). If the IRS were to take your property to pay taxes that someone else owed a wrongful levy claim is one of the ways to get your property back.

Why would the IRS seize your property to pay someone else’s taxes? Well it might just be a mistake, but that’s unlikely. One way it might happen is if a closely held corporation ran into IRS or California payroll tax problems. Perhaps the owner decided that rather than deal with this tax problem he would start another company; we will call it “Newco.” When the IRS gets wind of this if it determines that Newco is a transferee, nominee or alter ego of the original company (let’s call it “Oldco”) it will levy (that is seize) the assets of Newco to satisfy the payroll tax liability of Oldco.

Newco may have some defenses to the IRS levy. For example in some cases if Newco paid fair market value for the assets of Oldco it is possible that Newco may not be responsible for Oldco’s payroll taxes. In order to get the money back it would be appropriate to file a wrongful levy claim with the IRS. Another possible remedy is to file suit in United States District Court under Internal Revenue Code Section 7426(a)(1).

Internal Revenue Service (IRS) in Payroll Tax Dispute with FedEx

January 22, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) is in a payroll tax dispute with FedEx, and the IRS is proposing to assess tax and penalties against FedEx because it believes that the company has improperly classified its drivers as independent contractors rather than employees. According to FedEx if the IRS prevails the amounts due for 2002 will be in excess of $319 million. FedEx believes, however, it has “strong defenses.”

Payroll tax disputes with the IRS over whether workers are employees or independent contractor are quite common, in part because of the difficulty of determining the proper worker classifications. The IRS employees a 20 factor test in making this determination. This test has is set forth in IRS Rev. Rul. 87-41 . These factors are not weighted equally but must be evaluated in accordance with their significance in each particular case. No one factor is controlling. The 20 factors set forth in the ruling are:

1. Instructions

Internal Revenue Service (IRS) Extends Trust Fund Tax Express Installment Agreements Program

January 11, 2008 | by Dennis N. Brager

The Internal Revenue Service (IRS) has extended its policy of granting express installment agreements for in business trust fund taxes through at least June 6, 2008. See IRS Memo dated June 6, 2007 Express installment agreements are available to in-business taxpayers who have payroll tax problems of less than $10,000. These taxpayers may allowed to enter into installment agreements without providing a completed Collection Information Statement (IRS Form 433-B). An express installment agreement can’t last longer than 24 months. Taxpayers requesting express installment agreements must be in compliance with all IRS tax deposit and tax filing requirements as set forth in Internal Revenue Manual (IRM) 5.14.1.5.1. In addition if a taxpayer qualifies for an express installment agreement then:

• No Trust Fund Recovery Penalty determination is required; however the revenue officer must ensure that the Assessment Statute Expiration Date (ASED) is protected.

• No managerial approval is required.