Employment taxes arise from the employer’s payroll computation. From the wages of each employee, the employer is required to withhold Federal Income Taxes and Social Security and Medicare taxes. During each pay period, an employer must make federal tax deposits of the taxes withheld. He must also file Form 941, Employer’s Quarterly Federal Tax Return, reporting the total wages, taxable Social Security wages, Federal Income Taxes withheld, and Social Security and Medicare taxes. The IRS matches the amount of taxes withheld and reported on an employee’s Form W-2 with the amounts the employer has reported on Form 941. If the amounts do not match with the actual payments made by the employer, the IRS will contact you. The employer is also required to report and pay its portion of the Federal Insurance Contribution Act (FICA) taxes, as well as the Federal Unemployment Tax Act payments (FUTA).
The significance of an employer paying employment taxes cannot be overstated. The reason is that once the federal and social security taxes are withheld from an employee’s wages, IRS must credit this amount against an employee’s individual income tax liabilities regardless of whether the credits may result in refunds to the employees. These taxes withheld by the employer are referred to as funds held “in trust” for the United States. If these trust fund taxes are not paid, the United States suffers a loss of revenue.
Congress enacted Section 6672 of the Internal Revenue Code to protect the United States against this loss of revenue. Protection was provided in the form of giving to the IRS another source from which to collect the “trust fund taxes.” That additional source is those persons or entities, which are required to collect, truthfully account for, and pay over the trust fund tax, but who willfully fail to collect such tax, or truthfully account for, and pay over such tax. The purpose of this provision is to prevent officers, owners, and employees from using these trust fund taxes in their business. The liability these persons face personally is for 100% of the taxes actually withheld from the wages of employees that were not paid over to the United States; hence the term “100% penalty” or “6672 penalty.”
The amount of the 100% penalty is an amount equal to the employee’s portion of the FICA taxes and all of the withholding taxes that were to be paid over to the United States. The penalty is civil in nature, but criminal prosecution can be recommended for repeat offenders.
A substantial part of the work in the IRS Collection Division relates to delinquent quarterly payroll taxes and the non-filing of employment tax returns. Collection from employees determines which individuals are responsible officers for purposes of assessing the 100% penalty.
At a minimum, competent tax representation in employment tax cases requires the ability to quickly structure a plan acceptable to IRS that will ensure the filing of any delinquent employer returns and internal mechanisms for the employer to maintain compliance with all filing requirements. In addition, your representative must be able to structure a plan acceptable to IRS for payment of any delinquent taxes while at the same time preventing or keeping at a minimum the personal liability of responsible officers.