IRS Payroll Tax Violations Can Lead To Severe Penalties—Including Prison Time
The IRS is aggressive about collecting income taxes, but it’s even more relentless when it comes to payroll taxes.
These funds, withheld directly from employees’ wages, are considered “trust fund” taxes—money that rightfully belongs to the U.S. government. When employers fail to remit these funds on time, the IRS responds swiftly and harshly.
Even if a business uses the withheld taxes to pay suppliers or keep operations running, the IRS doesn’t consider that a valid excuse. It holds individuals personally accountable, including business owners, officers, check signers, or anyone with authority over financial decisions. In some cases, the IRS has even pursued third parties—criminally.
Delinquent payroll taxes, even if only late, are a serious matter. Many businesses use payroll services to prevent the misuse of these funds, but this isn’t a foolproof solution. In some cases, payroll providers themselves have misappropriated funds, a risk highlighted in a report from the Treasury Inspector General.
Employers must choose payroll partners wisely. When a shortfall happens, the IRS often initiates personal assessments against all “responsible persons”—those who own, manage, or have signature authority over company finances. Under Section 6672(a) of the tax code, the IRS can impose a Trust Fund Recovery Penalty (often called the “100% penalty”) equal to the unpaid taxes. This penalty can be assessed against multiple individuals, and the IRS can pursue all of them until the full amount is recovered.
Being labeled a “responsible person” doesn’t require intent or even awareness of the tax issue. It simply means you had the authority to ensure the taxes were paid. A recent case underscores the consequences. Brett Hill, CEO of two telecommunications companies in Maryland, was convicted of 16 counts of failing to pay over withheld payroll taxes. He was responsible for collecting and remitting taxes and for filing the required tax returns. Though he withheld the taxes from employee paychecks, he never submitted the funds or the necessary filings to the IRS. The resulting tax loss exceeded $1 million. Hill now faces up to five years in prison for each count.
Payroll tax enforcement has long been a focus for the IRS. A prior report from the Treasury Inspector General for Tax Administration revealed alarming trends in employment tax crimes and emphasized the need for stronger civil and criminal enforcement. It called on the IRS Criminal Investigations Division to take a more aggressive stance and urged IRS agents to broaden their criteria for referring egregious cases.
The bottom line: employers hold payroll taxes in trust for the government. Failure to properly account for and deposit these taxes can lead to devastating financial penalties—and serious criminal consequences.
Source: Forbes
