Consequences of not paying payroll taxes

When businesses are struggling to make ends meet, they may make the mistake of not paying payroll taxes to pay other bills.  The late penalties vary depending on how many days the payment is made late.

If the taxes get too far behind, the IRS can freeze a business’s bank account and even padlock the doors and close it down.

A person who is a responsible person can be criminally liable.  This can apply to corporate officers, partnership members, employees, and others responsible for collecting and paying withholding taxes. 

Company officers will often not want to take the time to review the payment of taxes.  It is common for a director or chairman to make an employee responsible for paying payroll taxes.  If an employee doesn’t pay the payroll taxes, the officer should be concerned.  Delegation to an employee does not relieve an individual of responsibility to pay taxes to the IRS.  The IRS has ruled that the authority that assigns control ultimately has a nondelegable duty to ensure that withholding taxes are collected and paid.

A person can be held liable for a penalty for the willful failure to collect and pay the employment taxes of a business.  This is called the “trust fund recovery penalty” (TFRP).  The trust fund penalty is based on the amount of federal income taxes withheld from the employees’ wages and the employees’ share of Social Security and Medicare (i.e., FICA) taxes.  In other words, the amount of taxes that were taken out of the employee’s checks.

If an employee embezzles the money instead of paying the taxes, the company officers are held responsible.

When a business gives money to a payroll company or an outside accountant to pay the payroll taxes, and the taxes are not paid, the business is still liable for the unpaid taxes. 

Since the officers can be liable for the payroll taxes its’s a good idea to regularly retrieve the IRS transcripts to verify the taxes have been paid.  Retrieving transcripts is a much better option than being personally responsible for trust fund penalties.

Unlike income taxes, trust fund penalties can not be discharged in bankruptcy.  It is possible to make an Offer in Compromise on trust fund penalties.  However, this can be very difficult.

A business that has received a threatening letter from the IRS should consult with a licensed tax professional immediately to avoid having their bank accounts frozen, or business shut down.

The consequences of not paying payroll taxes should be taken very seriously.  Don’t make the mistake of ignoring letters from the IRS. 

David Zubler has an accounting degree and computer science degree with high distinction and has experience as an accounting manager and controller in manufacturing, and has owned his tax/consulting business since 1990.  David Zubler is the founder and president of Your Tax Care.  The company provides business and tax education to the public at its website,  David can also be contacted by email at