The current economic recession has had a hard toll, especially on small businesses. Their access to financing and their ability to shoulder tough business seasons are much less than that of bigger businesses. For this reason, many small businesses are being tempted and choosing to skip the remittance of payroll taxes and instead using these funds to work at surviving in the struggling economy. However noble the reasons for defaulting on payroll taxes may be, the IRS is indeed, not happy with this trend. They are now aggressively seeking such businesses and implementing tough consequences for these defaulters. According to tax experts, payroll taxes may lack the urgency of remitting as compared to other business creditors as the IRS does not proactively seek to recover the funds. However, delaying or not submitting the payroll taxes has the potential of bringing your business to a halt. From freezing a business’s account receivables to placing a lien on the wages of staff responsible for remitting the payroll taxes, the IRS can literally cause havoc to your business. It is therefore, advisable to remain in the good books of Uncle Sam.
Report by Treasury Inspector General for Tax Administration on Payroll Taxes
The extent of delayed and non remitted payroll taxes by many businesses was highlighted by a report on payroll tax compliance done by the Treasury Inspector General for Tax Administration (TIGTA) in early 2011. According to the report by this IRS watchdog organization, about $54 billion of payroll taxes are not remitted every year. This is a huge contributor to the tax gap. For this reason, the IRS has taken drastic measures to catch up with defaulters of payroll taxes.
New Approach Taken by the IRS
Following the report by TIGTA, the IRS has randomly picked some 6,600 employers and is auditing them for payroll tax compliance. The IRS states that this is a start and probably, it hopes that the audits will send a warning to any businesses that are still not complying with tax requirements. Some tax experts have seen this move by the IRS as being unfair and harsh, as it sidelines some employers to take the blame of many others who are not complying. Unfortunately, a non-compliant employer is already at fault and lacks any defense and therefore, the employers who are picked in the sample have no recourse for being selected.
Implications of Withheld and Unremitting Payroll Taxes
According to the tax code, the IRS has a right to hold the company responsible for non-remitted taxes. It also has a right to hold responsible the various individuals and entities who have control over the business accounts and who are responsible for remitting the taxes. This includes the accountants, book keepers, treasurers, and owners of the business. The IRS can even hold business creditors responsible for payroll taxes if they prevent the remittance of the taxes by taking control of the business accounts to recover their debts.
When the IRS catches up with a business that has not complied with payroll taxes, they will not only seek the payment of the due taxes, but will also levy the late payment charges that go as high as 25% of the payroll taxes due. The employer is also expected to pay any interests that would have accrued because of the delay in remittance. The amounts due can really sky rocket and can easily drive a business into economic hardship or even bankruptcy. It is therefore, best to pay your payroll taxes within the deadline and to seek compliance as soon as possible if you are already a defaulter to minimalize your IRS problems.