Now, let’s talk about when businesses file and pay late. Not only does the failure to-pay and failure-to-file penalty up to 47.5 percent apply, but there’s also the failure to make Federal Tax Deposit Penalty.
Filing Form 941 and Form 940 with IRS
Employers who file the Form 941 owing over $2,500 for the quarter currently or the previous quarter, as well as people who file the Form 940 owing over $500 for the year, must make federal tax deposits using the Electronic Federal Tax Payment System. Failure to use the Electronic Federal Tax Payment System or to make the federal tax deposits will result in a penalty. This penalty can be abated if reasonable cause applies.
Business Receiving Notice of Federal Tax Lien
Just like individuals, businesses can have the Notice of Federal Tax Lien filed if a taxpayer neglects or refuses to pay overdue taxes. It attaches to business property and rights to property including accounts receivable. Businesses should also be aware that the Trust Fund Recovery Penalty can be assessed against individuals. These are usually people responsible for collecting the trust fund tax and who knowingly fail to do so.
What are Trust Fund taxes?
Trust fund taxes are those withheld for employee wages and excise taxes. Congress established the Trust Fund Recovery Penalty to encourage prompt payment of the trust fund taxes, and as an additional tool to collect. For employment taxes, the amount of the penalty equals the unpaid income tax plus the unpaid FICA. When trust funds taxes are unpaid, we conduct an investigation to determine if the penalties should be assessed and against whom. The first step is an interview on who can be assessed. The interview determines who had the responsibility to collect and pay the tax but willfully and knowingly failed to pay it over.
Late Payment of Trust Fund Taxes
The position of the IRS is that paying other creditors or net payroll, but not the associated tax, implies willfulness. Under consideration for the Trust Fund Recovery Penalty are those who: determine financial policies for the business; direct and authorize payments of bills to creditors; authorize and make federal tax deposits; and sign payroll tax returns. Assessment doesn’t mean that the trust fund gets paid twice by the individual as well as the business. It’s only paid once by either the business or the individual or a combination of the two.
Trust Fund Tax Penalty
The penalty is assessed against the individual though, so a Notice of Federal Tax Lien may be filed. And if arrangements aren’t made to pay it, collection actions may be taken against the individual’s assets. The trust fund can be appealed to the Office of Appeals. How to appeal is explained in the letter sent proposing the assessment.
Assessment of the Trust Fund Recovery Penalty
Even if a business is granted an installment agreement, IRS may still consider the assessment of the Trust Fund Recovery Penalty. It’s usually based on the facts and circumstances of the case, as well as the history of compliance. For example, if a taxpayer has a history of prior default in installment agreements, we may be more inclined to assess the Trust Fund Recovery Penalty in order to be assured that we can collect this tax. On the other side, it’s also possible to hold off on the assessment of the Trust Fund Recovery Penalty, and it again depends on the facts, circumstances, and the history of compliance.
Form 2750, the Waiver Extending the Statutory Period for Assessment of the Trust Fund Recovery Penalty
If there’s not enough time left on the assessment statute of limitations to allow full payment of an installment agreement, then the responsible person may be asked to sign the Form 2750, the Waiver Extending the Statutory Period for Assessment of the Trust Fund Recovery Penalty. This is usually extending it beyond the terms of an installment agreement. So, if the installment agreement terms are not met, the trust fund can still be collected.
Businesses that fail to meet the IRS payment requirements
Businesses that fail to meet the payment requirements are subject to the same penalties and interest as individuals. For employment tax deficiencies, businesses are subject to the Federal Tax Deposit Penalty. Some responsible individuals may be held liable for the Trust Fund Recovery Penalty personally, and businesses as well as individuals that don’t make arrangements to pay their delinquency are subject to the Notice of Federal Tax Lien, Levy, Seizure and Sale, and they have collection appeal rights.