The No. 1 reason why taxpayers get into trouble with the IRS is payroll taxes.
A common scenario is that a business owner with cash problems foregoes filing the 940 and 941 tax returns and does not pay the taxes due for a pay period. They plan to catch up next month. Nothing happens, so the owner continues not to pay the taxes when cash is short. It can take up to three years for the IRS to notice. Then, the tax collectors first write polite letters requesting copies of the missing 940 and 941 returns. Things degenerate quickly after that.
Misclassification of Employees
Another frequent scenario is that a business owner has structured the business so that labor is performed by independent contractors instead of employees. The IRS (and the U.S. Department of Labor) audits to determine if employees have been misclassified as independent contractors. The state of Colorado is auditing aggressively for the same purpose. The auditors may determine that the independent contractors actually are employees and reclassify them. Then, they issue a retroactive tax bill in the amount of the unpaid payroll taxes due during the entire audit period. The company has the right to appeal the tax assessment, but many appeals fail.
What Happens When Payroll Taxes Are Not Paid?
If the taxes are not paid, both the IRS and the state agency can and will levy the company's bank accounts and customers to collect the taxes. Obviously, if the IRS continually takes the funds in the company's bank account by levy, checks to vendors, the landlord, and others bounce. At that point it may not be possible to stay in business.
If the company does not catch up on its payroll taxes, the IRS is entitled by law to assess one-half of the unpaid payroll taxes to the personal accounts of the company's owners and managers. In other words, the company's payroll tax problem can become the owner's personal tax problem. This is one of several situations when the "corporate veil" can be pierced to hold the owners of a business responsible for the company's tax debt.
There are solutions for these tax problems. But prevention is better -- and probably less painful. If you find yourself in one of these situations, we can assist you in diagnosing the problem and in finding a workable solution.