IRS Actions for Payroll Delinquency
The IRS may require the employer to deposit tax daily or semi weekly. They use the amount of liability for example in the previous year. If the payroll liability was above certain amount then they may be placed on semiweekly (50K).
Typically for accounting for payroll taxes, the government requires that employers file a quarterly Form 941. On this from you tell the IRS the gross wages that you paid and the tax you withheld from the employees. Add to that the employee’s social security and Medicare liability and the matching of them.
This constitutes the liability for the quarter. The company reports also the deposits it made during the quarter to dispose of the liability. The difference between the amount of taxes collected and the matching on one hand and the amount paid on the other hand should be the liability for this quarter.
Breathing Down Your Throat
The IRS may require those delinquent employers to file not quarterly but monthly instead to make the monitoring process more vigilant and thus detect tax problems before they become larger.
The IRS additionally appoints revenue officers. These people are very aggressive and usually will breathe down the employer’s throat. They will ask the employer to file the tax not through the regular channels but to send the return to them. That way, it’s quicker for them to discover a tax problem (instead of taking two to three weeks or even months to discover a problem). As soon as you fax the Form 941 to the revenue officer, you get a phone call discussing your delinquency.
It is very hard to defend the assessment of this penalty including the reasonable cause defense. There may be circumstances when one could establish reasonable cause to mitigate the willfulness issue.
If, for example, a manager discovers that payroll taxes have not been paid and instructs the bookkeeper who signs the checks to give a priority to the IRS and follows up by constantly monitoring the payments and making some payments to catch up, there may be a reasonable cause defense available (consult your tax attorney, your CPA or your enrolled agent.)
Appealing Trust Fund Recovery Penalty
Generally, it is difficult to win the appeal of a trust fund recovery penalty because there are two axes on which you will have to build your defense. The first is responsibility and the second is willfulness. If you are an officer of the corporation who is responsible for making the decision as to who to pay, there is little tax relief you can obtain from the appeal.
Appealing is Always Attractive
Similarly, if you decide to appeal the willfulness you may not have good luck either because just by the mere fact that you made the decision as to who you want to write the check to instead of the IRS establishes willfulness right there.
Why then appeal if you are dead in the water? You appeal because you have 60 days from the time you receive the penalty notice plus the time the case sits in appeals. Things may happen. You may be able to pay the taxes to begin with. Also you may have a chance for the statute of limitation on this penalty to have expired. The statute of limitation for this penalty is six years.