Business Taxes, Payroll Taxes and Trust Fund Recovery Penalty

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When the business faces a cash flow problem, many business owners use the payroll taxes collected but not yet turned over to the IRS.

Many small business owners are not familiar with their payroll tax obligations. Such ignorance may result in serious negative consequences not only for the business but also for the business owner and other employees of the business. Both the IRS and the state tax agencies in Maryland, Virginia and Washington, D.C. require regular and full payment of the employer portion of the employment
and payroll taxes. In addition, the federal government and the state tax authorities also ask that the business remit the income taxes withheld from the employees' paychecks by the employers on a regular basis. Failure to do so, may have civil and criminal tax consequences.

When the business faces a cash flow problem, many business owners use the payroll taxes collected but not yet turned over to the IRS or Maryland, Virginia and Washington, D.C. governments as general business funds and hope that when the cash flow problem is resolved to pay it back with penalty to the government. However, in many cases the cash flow problem persists and unpaid payroll taxes pile up.

Federal law as well as state laws in Maryland, Virginia and District of Columbia allow the government to assess part of the delinquent payroll taxes as trust fund recovery penalty against specific individuals within the business. Once these individuals are identified as potentially responsible for the delinquent employment and payroll taxes, the IRS and state tax agencies notify them of such identification. Taxpayers have limited time to challenge such findings by the government. Maryland tax lawyers in our law firm frequently hear from business owners whose ignorance of payroll tax laws results in imposition of trust fund recovery penalty against them and also against other employees of the business. The law allows the IRS and state tax authorities in Maryland, Virginia and Washington D.C. to force the business to close if the government concludes that the business is no longer able to comply with its tax obligations.

Payroll tax liability may be assessed against responsible people in the company if certain conditions are met. Federal tax law allows the IRS to impose payroll and employment tax liability if the targeted individual held specific responsibilities in the business and failed to pay the tax willfully. Willful failure is a term of art and has a much broader meaning than 'intentional refusal'. The test for assessment of the trust fund recovery penalty is similar but not identical under Maryland, Virginia and Washington, D.C. tax laws.

ABOUT THE AUTHOR: Kamyar Mehdiyoun, Esq.
Kamyar Mehdiyoun holds a Master of Law (LL.M.) degree in taxation from Georgetown University Law Center and focuses his practice on tax law. In 2003, he received the Award for Excellence in Tax Practice and Procedure from Georgetown. He also holds a Certificate in Employee Benefits Law from Georgetown.

He graduated from Boston College Law School with a Juris Doctor (J.D.) degree in 2000.
Before entering law school, he was a doctoral candidate at Columbia University where he earned a Master of Arts degree and a Master of Philosophy degree both in political science.

Prior to starting his solo practice, he worked at several large law firms in New York, Washington, D.C., Baltimore and Boston where he primarily focused on tax and corporate law. Attorney Mehdiyoun has authored numerous articles in leading legal journals on tax and employee benefits law.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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