Payroll Tax Troubles - Employment Taxes Gone Bad

Payroll tax disputes can destroy a small or medium business and have a disastrous effect on business owner's personal finances. This article will provide a general discussion of the typical payroll tax controversy and some tips on how to address payroll disputes.

Payroll taxes disputes often arise when businesses fail to timely file employment tax returns (such as the Forms 941 or 940) and/or when businesses fail to timely remit their employment taxes to the IRS.

In either case, the IRS will assign the matter to a Revenue Officer. The Revenue Officer's job is to interview the taxpayer and third parties in order to (1) collect the tax return and payment in full or (2) gather enough evidence to pin the trust fund recovery penalty on as many individuals as possible.

The trust fund recovery penalty is the mechanism whereby the IRS sidesteps the protections of the taxpayer's legal entity to impose a personal liability on each individual who could have seen to it that the taxes were paid. The IRS refers to these people as "responsible persons." The penalty imposed on "responsible persons" each individual is equal to 100% of the unpaid taxes at the time that the Revenue Officer assesses the penalty.

There are a number of court cases which specify who is and is not a "responsible person" for purposes of this IRS penalty. A number of cases have even held that persons who are the CEO of the company may not be the "responsible person" in some circumstances.

Taxpayers who find themselves subject to this penalty will want to hire an experienced tax attorney immediately. In many cases the tax attorney may be able to convince the Revenue Officer that the taxpayer is not a "responsible person" or make other taxpayer-favorable payment arrangements; thereby avoiding the trust fund recovery penalty altogether.

In other cases the tax attorney can help build a case that the IRS determination as to who is the "responsible person" is incorrect. These facts must be included in the IRS record at the time that the Revenue Officer is working the case and, unfortunately, Revenue Officers do not add this information to the case file without strong pressure to do so.

If taxpayers miss these opportunities, then they still may be able to ask a different function or branch of the IRS to remove the penalty. If that fails, taxpayers can ask the courts to rule that the IRS was not correct in determining that he or she was a "responsible person" and imposing the civil trust fund recovery penalty.

This can be difficult in cases where the taxpayer has failed to timely file employment tax returns. The Supreme Court, in a case that is often cited by the IRS in the payroll tax context, essentially said that there is no excuse for filing a late tax return. A number of courts have echoed this sentiment.

The Third Circuit Court of Appeals has extended this reasoning to say that "yes, there is no valid excuse for filing a late return unless the taxpayer is does not find themselves in the position of the ordinary taxpayer." It is up to individual taxpayers to show how they are not the "ordinary taxpayer."

An experienced and creative tax attorney can go a long way in helping to eliminate, resolve or minimize the damage that employment tax controversies have on small and medium sized businesses and their owners.

Source: http://ezinearticles.com/?Payroll-Tax-Troubles-Employment-Taxes-Gone-Bad&id=536852
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