Part of the Coronavirus Aid, Relief and Economic Security (CARES) Act allowed employers to defer payment of their share of payroll taxes required between March 27 and December 31, 2020. Those deferred payroll taxes are paid back in two installments – the first due December 31, 2021 and the remaining by December 31, 2022.
Also, employers could defer the employee share of those payroll taxes for September 1 – December 31, 2020 (via a presidential memorandum on August 8, 2020). That deferral would be paid between January 1 and April 30, 2021.*
*UPDATE: The Consolidated Appropriations Act 2021, signed into law December 27, extended the period that the deferred taxes are paid. It is now for the entire year − from January 1 – December 31, 2021.
You can see the potential for trouble ahead. While 
deferring these taxes certainly helped employers under financial strain because of the pandemic, it only delayed the inevitable – those deferred taxes have to be paid. Add those to the normal taxes already due, and many are facing a tax bill they cannot pay.
Are you One of the Responsible Persons?
If an employer does not pay those deferred taxes, the IRS will start looking for the “individuals who are responsible persons with respect to the business” for those unpaid deferred taxes.
A responsible person is someone who is required to collect, account for and pay over the taxes. You don’t have to be an owner to be considered a responsible person. If you don’t collect, then you are subject to the penalty – the TFRP (trust fund recovery penalty). (Fun fact – employment taxes are considered trust fund taxes because the responsible persons hold the taxes in trust for the government).
But how do you know if you are a ‘responsible person’ – at least when it comes to payroll taxes for a company? There are seven factors to be considered:
- The person is an officer or member of the company’s board of directors
- Owns shares or has an entrepreneurial stake in the company
- Active in management of the daily affairs of the company
- Has HR powers – ability to hire and fire
- Makes decisions on which/when/what order outstanding company debts are paid
- Has control over bank accounts and disbursement records
- Has check-signing authority
It is not a single factor that determines the decision, but rather a complete picture of circumstances. The critical issue is whether or not the person had authority/ability within the company to pay the taxes owed.
The TFRP is not about finding a scapegoat. Often, the IRS finds more than one individual is responsible.
Evil Motive Recklessly Disregarded
It doesn’t take an evil motive to be a responsible person. If you knew of the outstanding taxes and paid other bills instead, you are on the hook. If you ‘recklessly disregarded’ known risks that those payroll taxes would not be paid, you are on the hook. For example, if you failed to investigate suspicions of taxes not getting paid, that is reckless disregard.
There are three situations that meet this reckless disregard standard:
- Reliance on the statements of the person in control of the finances when the circumstances show the responsible person (you) knew that person was unreliable
- Failure to investigate/correct mismanagement after having notice of withholding taxes not getting paid
- Knowing the business is in financial trouble and still paying other creditors without asking questions about if withholding taxes are being paid
Essentially, if you knew or should have known, you are going to have a problem.
So, what does this all mean? Relief from deferring these payroll taxes was only short-term. The day is coming when you will have to pay them – on top of the taxes you normally owe. And if the business can’t pay the taxes it owes, people with the business – responsible persons – could be facing a TFRP.
One Last Thing
If your business cannot pay the taxes it owes and you find yourself facing a TFRP, Strategic Tax Resolution can help. We handle multiple types of tax resolution cases, including Payroll Tax/TFRP. Strategic Tax Resolution is the ‘guy on your side’ – tax resolution experts with local offices and online-assisted means to better serve you. We work to negotiate the best possible outcome for you. Contact us today at any of our local area offices, by email or call 888-339-4914. Follow us on social media. Get Relief!