Social Security withholdings are required on all employee wages up to a certain amount. Additionally, employers and employees each pay half the social security tax. If an employer fails to withhold social security tax, the employer is liable for the tax. An employer can also be held accountable for any income tax withholdings that should have been timely made. The Internal Revenue Service aggressively pursues employers that fail to pay these employment taxes or incorrectly classifies workers as independent contractors to avoid employment taxes. The Internal Revenue Code authorizes the Internal Revenue Service to assess severe penalties against employers that fail to withhold employment taxes and/or incorrectly classify workers. The Internal Revenue Service has been referring employment tax cases to the United States Attorney for criminal prosecution in certain cases. Given the high stakes associated with these types of cases, it is extremely important to have employment tax representation with significant experience in employment tax matters to represent you or your business at the first sign of trouble with the Internal Revenue Service. We have substantial experience representing both small and very large business employment tax issues not just before the Internal Revenue Service, but also before just about every federal court.
From our very first meeting, we carefully review the facts and circumstances of each client with employment tax matters. If employment taxes were not made due to an oversight or because of financial difficulties, typically we will attempt to mitigate the penalties that can easily double the original employment tax liability. In more severe cases, the Internal Revenue Service may aggressively attempt to reclassify contractors as employees, leaving the business owner liable for a significant employment tax liability. This liability can be assessed retroactively a substantial number of years, essentially putting a business owner out of business. In these types of cases, we typically attempt to convince the Internal Revenue Service not to reclassify the workers at issue from independent contractors to employees. In some cases, where the business owner incorrectly classified workers as independent contractors, we may be able to request relief for a client under Section 530 of the Revenue Act. This is a special program that offers relief to employers that incorrectly classified workers as independent contractors. Under this program, if certain qualifications are satisfied, a business may not be liable to pay back the vast majority of assessed employment taxes, interest, and penalties.
Trust Fund Recovery Penalty
If an employment tax cannot be resolved at the business level, the Internal Revenue Service will typically seek to impose a penalty authorized under Section 6672(a) of the Internal Revenue Code. This penalty is known as a “trust fund recovery assessment.” Internal Revenue Code Section 6672(a) authorizes an assessment of a penalty equal to 100 percent of the employment taxes which a business was obligated to pay to the Internal Revenue Service against so-called “responsible persons.” The Internal Revenue Code defines a “responsible officer” as any person who is responsible for the collecting and paying of employment tax to the government. The Internal Revenue Service has broadly defined a “responsible officer” to include corporate officers, directors, shareholders, corporate counsel, bookkeepers, and even creditors of a business. The Internal Revenue Service takes the position that those individuals who have a say in the decision whether or not to pay creditors instead of the Internal Revenue Service may be classified as “responsible officers” for purposes of the trust fund recovery penalty. (Even though the Internal Revenue Service has been extremely liberal in assessing trust fund recovery penalties, federal courts have not been as generous in upholding these assessments).
Once a trust fund penalty is assessed against a “responsible officer,” the Internal Revenue Service typically aggressively collects the penalty and in many cases prioritizes the collection of a trust fund recovery penalty over the collection of other tax liabilities. If the Internal Revenue Service has classified you as a “responsible officer” or is considering classifying you as a “responsible officer,” you will immediately need the assistance of a qualified tax attorney with substantial experience in this area. The stakes are incredibly high any time the Internal Revenue Service considers classifying an individual as a “responsible officer.” Because the stakes are so great in these type of cases, we aggressively fight the Internal Revenue Service any time there is an allegation that an individual is a “responsible officer.” We have represented a substantial number of individuals accused by the Internal Revenue Service as being “responsible officers” in audits and before the Internal Revenue Service Appeals Division. We also have significant trial experience in just about every federal court contesting trust fund recovery penalties.