Payroll Tax Theft
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What To Do When Withheld Taxes Were Not Remitted to the IRS
Payroll tax theft occurs when an employer withholds federal income tax or FICA tax from employee wages, but those funds are not sent to the IRS. The problem may arise from cash flow misuse, accounting errors, a dishonest bookkeeper, or theft by someone inside the business. Because withheld payroll taxes are held in trust for the United States under 26 U.S.C. § 7501(a), the issue is treated very seriously under federal tax law.
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When this type of theft is discovered, the first priority is to determine exactly what happened. Employers should consult with Selig & Associates as soon as possible so the facts can be reviewed quickly and accurately.
Selig examines payroll records, Forms 941 or 944, Forms W-2, bank statements, EFTPS confirmations, and general ledger entries to determine whether the taxes were actually withheld, whether deposits were made, and whether any funds were diverted or misapplied. We can also help you preserve critical records, assess potential IRS exposure, and identify the next steps needed to protect the business and its owners.
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TAKE NOTICE: If an employee, bookkeeper, or payroll processor stole the money, the employer should document the event immediately. Save emails, system logs, payment records, and any evidence showing who had access to the funds. In some cases, the matter may need to be reported to law enforcement or insurance carriers.
Federal law gives the IRS strong collection tools in payroll tax cases. The Trust Fund Recovery Penalty under 26 U.S.C. § 6672 may apply to responsible persons who willfully fail to collect, account for, or pay over trust fund taxes. Employers are also subject to employment tax deposit rules under 26 U.S.C. § 6302 and 26 C.F.R. § 31.6302-1, and penalties may apply under 26 U.S.C. § 6656 for failure to deposit. Depending on the facts, other penalties may also apply.
A theft by a bookkeeper does not automatically excuse the business. Even if the funds were stolen, the IRS may still hold the employer liable for the unpaid taxes. However, the facts may support penalty relief, a reasonable cause argument, or a defense to personal responsibility depending on who had control, what was known, and what actions were taken after discovery.
The most important step after discovering payroll tax theft is to act quickly, preserve evidence, and verify the IRS account. A forensic review can help determine whether the liability is real, whether payments were misapplied, and whether additional exposure exists for the business or individuals involved.
Key authorities: 26 U.S.C. § 7501(a), 26 U.S.C. § 6672, 26 U.S.C. § 6302, 26 U.S.C. § 6656, and 26 C.F.R. § 31.6302-1.
If you are dealing with payroll tax theft or an IRS employment tax problem, contact Selig & Associates at (212) 974-3435 for a confidential consultation.