Tax Law Insights

Businesses that have employees must pay wages and salaries to their employees, and the employer must collect federal employee income taxes and the employee's share of social security (FICA) from these wages and salaries, add the employer's "matching share" of FICA, and then deposit these taxes with the IRS. The Employer must file a quarterly return with the IRS (Form 941) reporting all wages and salaries paid, all tax deposits made during the quarter, and pay any balance due with the quarterly return.

The Recession took a heavy toll on businesses throughout the country, with many businesses failing, closing, and going into bankruptcy. Other businesses managed to make it through the Recession, but could not survive after. These failed businesses were unable to pay a substantial amount of federal employment taxes.

Federal employee withholding taxes represent nearly 70% of all federal tax revenue to be paid to the IRS (from all taxes). As of June 30, 2016, the IRS estimates that nearly $60 billion of reported employee withholding taxes (Form 941) remain unpaid - and this measure does not include businesses that do not file their required returns. The Government reports that the "Tax Gap," the different between what is collected in taxes and what is not being collected, is substantial and that unpaid employment taxes comprise $79 billion of the "Gap."

Following the Recession, the IRS began to increasingly focus administrative efforts on employment tax compliance and enforcement. These efforts continue today, and include aggressive efforts by the IRS to contact businesses who do not file employment tax returns or make required employment tax deposits, to shut down businesses which are not compliant, and to assess the "trust fund recovery penalty" personally against the owners of these businesses - and others - to collect unpaid employee tax withholdings.

Federal employment taxes are also one of the highest priorities of the United States Department of Justice, Tax Division. The Department of Justice is similarly and aggressively pursuing businesses and their owners who have not paid federal employment taxes, using federal civil lawsuits (including injunctions) and also criminal tax prosecution against the owners of businesses who do not pay their employment taxes. Federal employment tax prosecutions are at an all-time high.

Businesses who are struggling financially certainly have problems, and federal employment taxes may be one of them. However, business owners must be aware that the failure to pay employee withholdings to the IRS cannot only result in consequences to the business, but in civil and criminal tax consequences to the business owner as well.