As an employer, you are responsible for making sure that federal income and payroll taxes are withheld properly.  These are called trust fund taxes, which we'll discuss shortly. 

But what's most important is that you are facing massive penalties if you don't withhold these taxes properly - and many businesses miss this.

Let’s break it down a bit.

What are trust fund taxes?

“Trust fund taxes”, named so because when the taxes are withheld they are placed in a trust fund until it’s time to pay the government, are considered by the government to be the employer’s responsibility. 

But who exactly is responsible? The IRS may define you as a responsible party, which means that even if you've delegated this to someone in your payroll department, you're still liable.

Who is responsible to pay trust fund taxes?

So exactly what does it mean to be a “responsible party”?  This applies to the business owner, and anyone who is responsible for managing company funds - particularly in the payroll department. 

But the IRS considers even individuals who have authority to sign checks responsible parties.  That means the employee who purchases office supplies, or makes decisions about how funds are used, or signs paychecks, could be held responsible.  If a director overlooks what his employee is doing, that doesn’t excuse him from being held responsible if the employee fails to manage these taxes properly.  Likewise, if an employee neglects to pay these taxes at the instruction of a superior, the employee still could face consequences.  Even someone who used to work at a business, and doesn’t anymore, could be held responsible if they still have any authority or position with the business.  (In fact, some CPA’s have been held liable for their clients’ unpaid taxes!)  

You get the picture.  Basically, any of your employees who handle the money could be considered responsible, as could you.  Even the definition of “responsible persons” that the IRS and the government use is a very broad definition.

What happens if you don’t pay trust fund taxes?

The IRS tends to watch carefully for failure to pay trust fund taxes.  Technically, it’s the government’s money, and they want every penny.  So they aren’t likely to overlook it.  

If you are caught underpaying, or not paying at all, the IRS will determine if it was “willful” - which can mean anything from intentional to remotely aware.  Don’t assume you can talk your way out of it!  

If found to be guilty, the government will consider this a serious offense - criminal, actually.  You could face a fine of $10,000, five years in prison, or both.  (And just to state the obvious, if you are intentionally moving the money around illegally, you can just expect the worst.)  

What should you do if you discover that you (or someone in your business) have underpaid these taxes?

Simply put, make every effort to pay them back!  We’re not going to give legal advice here, but the IRS does seem to crack down harder on people who are turning a blind eye on it, than people who are making an effort to fix the problem.  We would firmly suggest, though, that you consider paying the government back BEFORE you pay any other creditors or debts off.  Make this your priority.  Make any necessary arrangements to pay your back taxes, and proceed paying current taxes in total and on time.  The arrangements might be complicated and expensive and might take a long time, but that’s better than prison.

If you’re curious about some real-life examples, here are a few.  Millions of dollars in back taxes, tens of thousands in fines, and several years in prison combined, in just three examples.  It ought to drive home the point that this is a serious offense, and one which you should clearly avoid at great lengths. 

Naturally, talk to us if you're concerned.

Or read the full Journal of Accountancy article here.