As a business owner, you deal with payroll constantly and act as a temporary collection agent. You withhold taxes from your employees’ paychecks and remit them to government authorities at the federal and state levels.
When cash flow is tight, it can be tempting to use that money to cover a pressing invoice or make payroll. However, acting on this thought moves you from a cash crunch into a criminal investigation.
The boundaries of trust fund taxes
Trust fund taxes refer to the income, Social Security and Medicare taxes that you withhold from your employees’ wages. While this money is not yours or the company’s, you hold it in trust for the U.S. Treasury until the specified deadline for deposit.
The double threat of committing tax fraud
Using trust fund taxes for other business operations can constitute a willful failure to pay taxes. Intentionally failing to collect or remit your employees’ withholding taxes can result in hefty penalties. The amount of your Trust Fund Recovery Penalty (TFRP) is equal to the unpaid balance of the trust fund tax. In other words, if you owe $50,000 in trust fund taxes, you face a $50,000 penalty.
Furthermore, the IRS and the Michigan Department of Treasury hold you personally responsible for this penalty. This means the government can seize your personal assets to recover the unpaid federal and state taxes. Ultimately, you can also face a tax fraud criminal charge.
Acting now instead of later
Facing penalties and a fraud charge can be mentally and financially draining. The worst mistake you can make is trying to handle the consequences alone. With your business, reputation and freedom on the line, you need to act fast in protecting your legal rights.