The IRS “Trusts” You

  • January 14, 2011
  • Steve Wisinski, CPA, MAFF

One of the traps we see all too often with companies that are having cash flow issues is to delay payment of their payroll tax obligations.  Since the IRS doesn’t call you when they don’t get their money, it is naturally easier to pay the vendor who is calling.  This can be a serious mistake and here’s why:

Many business owners look at the monies owed to the IRS as just another bill they have to pay, just like a utility or office supply bill.  But, monies owed to the IRS are a far different than a normal vendor because what you owe them is not your money but money you have withheld from your employees’ paychecks and are holding on their behalf.  

When you pay your employee you usually determine a gross amount (eg “I’m going to pay you $100 a week”).  The employee, in effect, then determines how they want that $100 split up.  Through various forms and calculations, they are saying “I want $XX to go to the IRS for social security, $XX for federal income tax withholding, etc.”  After they determine all the taxes and other stuff to be taken out, then the balance goes to them as their net check.  At this point you are holding the funds for them and they have to turn around and give them to the government.  You, the employer, are determined to be holding the funds “in trust” for the IRS.  This is what can cause you trouble if you don’t pay.  If you break that “trust” and don’t pay the funds, you can be held personally liable for those funds, EVEN if you are just an employee!  No matter your role in the company, if you are making the decision not to pay you can be held personally responsible for those funds. [Note: this is just another reason why we suggest using a payroll company. Then the option isn’t there.]

The other issue with not paying the government is their ability to penalize you for not paying them.  Though they have been getting more responsive, the government doesn’t say anything right away if don’t pay them, unlike other vendors who call regularly.  So some business owners who have cash flow problems think it is easier to pay the vocal vendors and not the quiet government.  The problem is that it is costly to not pay the government.  The IRS (the state, and others) has the legal authority to charge penalties for late payment.  These can vary in amount and calculation, but they can range from 5 – 50% of the tax bill.  That is a substantial penalty for the “convenience” of paying them late.  Add that to the possible personal liability issue and you can see that this is just isn’t something you want to mess with.

 If you are running into any of these issues or have any questions about this please contact us.