There are a few seemingly legitimate reasons a business may fall behind on employment tax payments to the IRS. During an economic downturn, for example, maybe depositing withheld employment taxes was not financially feasible. The business may plan to make it up later, when conditions improve. Or maybe a poorly run third-party payroll firm failed in its duties – a fairly common issue about which the IRS recently warned businesses.
From a business perspective, these may seem like valid excuses. The IRS, however, does not really care whether there is a reasonable explanation. It may still come after a late-paying business in force.
Penalties quickly compound
The IRS takes employment tax matters (like all tax matters) quite seriously. Failing to deposit withheld taxes in a timely manner, failing to file forms 940, 941 or 944 by the deadline, or simply neglecting to pay the amount due can all lead to additional financial penalties, which quickly escalate based on lateness.
For example, the penalties for failing to deposit are tiered:
- 1-5 days late – 2%
- 6-15 days late – 5%
- 16 or more days late – 10%
- More than 10 days after the first IRS bill – 15%
Meanwhile, failing to pay can bring a penalty of 0.5% per month of unpaid tax, plus 1% monthly after a Notice of Intent to Levy. And failure to file comes with a penalty of 5% per month of unpaid tax as of the due date (with a possible reduction based on any failure to pay penalty). The penalty rate for both of these can grow to a maximum of 25%.
If the IRS believes there was a willful attempt to evade taxes, criminal penalties may be on the table.
Resolving employment tax issues
There are often avenues available for businesses that need to resolve undeposited or unfiled employment tax withholdings. The trick is finding one that both allows a business to remain financially stable and satisfies the IRS. This may involve an intense negotiation with federal tax officials. It’s also important to take proactive measures to prevent business or personal assets from being frozen.
The IRS, backed by the intricate U.S. tax code, is a powerful force. If you need to face the agency head-on, be sure to do so with robust legal support behind you.