IRS Pursues Payroll Tax Pyramiding

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You may think the IRS pursues all taxes equally but they don’t. The IRS is especially vigorous in going after payroll taxes withheld from wages that somehow don’t get paid to the government. This is trust fund money that belongs to the government and was withheld from wages.

That makes any failure to pay—or even late payment—much worse. In fact, that’s so regardless of how or why the employer or its principals use the money. See No Get-Out-Of-Jail-Free Card For Payroll Tax Liability.

When a tax shortfall occurs in this setting, the IRS will usually make personal assessments against all responsible persons who have ownership in or signature authority over the company and its payables. The IRS can assess a Trust Fund Recovery Assessment, also known as a 100-percent penalty, against every “responsible person.” See Section 6672(a). You can be responsible and therefore liable even if have no knowledge the IRS is not being paid. See What Is The Trust Fund Recovery Penalty?

When multiple owners and signatories all face tax bills they generally squabble and do their best to sic the IRS on someone else. Factual nuances matter in this kind of mud-wrestling, but so do legal maneuvering and just plain savvy. One responsible person may get stuck while another who is even more guilty may get off scot-free. See Supreme Court Deaf To Payroll Tax Woes.

Meanwhile, the government will still try to collect from the company that withheld on the wages. The IRS also wants to make sure this kind of bad tax situation doesn’t occur again. In extreme cases the government may seek criminal penalties. See Employers Who Violate Tax Law May Go To Jail.

More commonly, the government may seek to enjoin this behavior. For example, take Advanced Underground Construction, an Iowa-based company, and its principal, William David Ward II. The Justice Department is seeking an injunction against both, alleging the company repeatedly failed to pay federal employment taxes withheld from wage checks, the amount now due exceeding $370,000.

The company is using the withheld taxes as working capital, the suit claims. This practice is sometimes referred to as “pyramiding.” The DOJ notes that the company has made minimal payments of its tax debts, and that attempts to induce voluntary compliance have failed.

To stop the bleeding, the Justice Department is seeking an injunction to require the company and Ward to timely deposit and pay all withheld employment taxes and to timely file all employment tax returns


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  • FAQ #9 is the way to go. I would have looked at the bsnuseis operations income/expense situation as a first step. Assume that the net additional income reportable for the early years = zero. Translation: you run at a loss.OK. Now you can show the IRS that they didn’t lose any taxes because of nonreporting. That’s half the battle. But the other half is that the income (loss, actually) should have been reported on a U.S. tax return but wasn’t. That part you fail.This is where I think that FAQ #9 is all janky. I think FAQ #9 should cover anyone where there is no tax lost to the government. You filed and reported, you didn’t file and report the income. You had income but it’s offset by the foreign earned income exclusion. You had income but it’s offset by the foreign tax credit. There are all sorts of ways you can come out with a no tax due situation.However, FAQ #9 is narrowly written: in order to qualify you have to (1) report the income each year in the year it was earned; and (2) have paid tax in the U.S. on that income. Technically your case fails that.However I am perfectly willing to push a sausage through that pipe and try to make it work. You are within the spirit of what FAQ #9 is intended to do. You’re a grownup and if you want to give it a shot, I am with you.Short cut answer: yes, I might have done this with you. We’d look at it, weigh the expected outcomes, and choose an action. If you’re going in with your eyes open, that’s all we need.

  • The tax base usually exdnaps every year because there are more people and because people make more money.You would think law makers would reduce taxes for that reason alone, but the sheep, called Americans, believe more taxes are needed or increased to pay for services.The US gov’t has a 3 Trillion dollar annual budget for 2008.How much is enough?