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Articles Posted in Payroll Tax Problems

Due to the ongoing COVID-19 Pandemic, the IRS has provided relief to taxpayers by extending filing and other deadlines. Now, in an internal memorandum from Fred Schindler the Director of Headquarters Collection (SBSE), the IRS continues to provide relief to taxpayers with tax debt by suspending most tax collection activities. These changes mirror the previous relief provided by the IRS, and restates the relief contained in the People First Initiative.  Our tax litigation attorneys are advising our clients that they can expect enforced tax collection activities to be suspended unless there is an exigent circumstance including the loss of the opportunity for the government to collect taxes due. The expiration of the statute of limitations is one example.

The importance of the memo is that while it mostly repeats and fleshes out the People First Initiative, it is a direct “order” from the head of SBSE Collection to all Collection Executives. The People First Initiative is a bit more nebulous in terms of its actual impact on the activities of rank and file employees.  The collection activities outlined in the memo include most activities related to the collection process such as meeting with taxpayers, filing new Notices of Federal Tax Liens (NFTL), issuing levies, taking or scheduling seizures actions, and pursuing civil suit proceedings. Automated tax levy programs are also suspended. The memorandum also directs Collections not to default installment agreements for missed payments due between April 1 and July 15, 2020 (the suspension period).  Due to the ongoing and ever changing nature of the COVID-19 epidemic in the United States, the IRS may extend the suspension period and the incorporated relief provisions further.

It is important for taxpayers and their advisors to remember that even though collection enforcement activity will be rare from now through July 15th, once the suspension period ends the IRS may begin filing liens and levies with a vengeance. Our tax lawyers are therefore recommending to our clients that, to the extent practicable, they position themselves to take appropriate action to forestall collection after the suspension period ends. This includes submitting offers in compromise, and requesting installment agreements now.

In Greek mythology, King Sisyphus is punished by the gods and forced to roll a huge boulder up a hill only for it to roll down as it nears the top. No matter how much effort Sisyphus puts into attempting to push the boulder over the crest of the hill, it always come tumbling back down. He is doomed to push the boulder up the hill for all eternity. Sometimes collecting payroll taxes can be a “Sisyphean task” for the IRS. At least, that is what the 11th Court of Appeals wrote in a recent decision.

United States v. Askins & Miller Orthopedics, involved a private medical practice which refused to pay payroll taxes. The IRS first tried to negotiate an installment agreement with the medical practice’s business owners, but the business owners would ultimately renege on any agreement. Then the IRS issued a tax levy on property held by the medical practice in various entities, but the business owners would simply shift property to new entities out of reach of the power of the levies. Believing it was out of options, the IRS requested a permanent injunction from the district court to compel the taxpayers to perform and pay their employment taxes now and into the future.

The district court rejected the IRS request because the court argued that the IRS had yet to suffer irreparable harm. The district court reasoned that the IRS could still sue for monetary damages once the taxpayers again failed to pay their employment taxes. This is in spite of the fact that the district court conceded that the taxpayers exhibited a pattern of unlawful conduct likely to persist. In other words, the taxpayers would continue to find ways to not pay their taxes.

How the IRS Pursues Payroll Tax Collections
Payroll taxes represent both the employer and employee portions of Social Security and Medicare taxes, along with Federal income taxes that are withheld from an employee’s paycheck. The IRS takes an especially hard stance on the failure to remit payroll taxes, and uses aggressive collection efforts when pursuing these delinquent taxes.

The Trust Fund Recovery Penalty for Delinquent Payroll Taxes

The Trust Fund Recovery Penalty (TFRP) is a “penalty” equal to the trust fund portion of corporate unpaid payroll taxes..

When to Use the IRS Voluntary Classification Settlement Program
The IRS Voluntary Classification Settlement Program (VCSP) allows taxpayers to reclassify their workers as employees for employment tax purposes and eliminate the risk of payroll tax problems caused by misclassification in previous tax years. In essence, the taxpayer agrees to classify its workers as employees going forward and pays a small portion of the employment tax liability that would have been owed for previous tax years if the workers were considered employees. In exchange, the IRS will not conduct a payroll tax audit based on worker classification for prior tax years.

The VCSP should not be confused with the Classification Settlement Program (CSP), which is available to taxpayers currently under an employment tax audit. The VCSP is not available to taxpayers who are currently under an employment tax audit.

Eligibility for the Voluntary Classification Settlement Program

How to Resolve a Payroll Tax Dispute
Payroll tax disputes often arise when a worker is paid as an independent contractor, but the IRS or California Employment Development Department (EDD) believes that the worker is an employee. There are some differences between federal and state requirements, but a business will often have to deal with both the IRS and EDD when a worker misclassification problem arises.

The 20-Factor Test

Many employers believe that as long as they have a contract stating that a worker is an independent contractor, they are covered. This is not true. A worker is legally classified as an employee or independent contractor based on the circumstances of the employment relationship.

The IRS Classification Settlement Program Can Reduce Your Tax Debt
The IRS Classification Settlement Program (CSP) is designed to allow businesses to settle a tax debt owed due misclassifying employees as independent contractors. Along with safe harbor relief under Section 530, the CSP can be an effective tool for businesses involved in payroll tax disputes.

The Costs of Misclassifying Employees

Many businesses would like to treat their workers as employees, but the status of the employment relationship is not determined solely based on the employer’s classification of the worker. Rather, the facts and circumstances of the employment arrangement will determine whether the worker is an employee of independent contractor. In particular, courts will look at the behavior control, financial control, and relationship of the parties when classifying a worker.

Can an Employee Be Held Liable for Their Employer's Unpaid Taxes
An employee can be held liable for their employer’s unpaid taxes in certain situations. While most businesses withhold their employees’ income and payroll taxes and then transmit them to the IRS, there are cases where employers either do not withhold taxes or do not give the withheld money to the IRS. Employees need to be aware of their responsibilities as both taxpayers and a person responsible for collecting and paying a business’s income or payroll taxes.

Liability for Employee’s Unpaid Taxes

If your employer fails to withhold income or payroll taxes from your paycheck, you are still responsible for paying these taxes to the IRS. If you do not pay these taxes personally, you may face tax penalties, and you may not be eligible for Social Security, Medicare, or unemployment benefits.

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