While there are countless types of taxes that individuals and businesses must be aware of, some types are subjected to greater scrutiny than others when dealing with the IRS. This is true for employment taxes that are to be held by an employer when paying employees their wages. These taxes are then paid over to the IRS. If you have not been paying your business' tax withholdings to the IRS, it is important to know how to respond to protect your legal rights.
What Is Tax Pyramiding?
According to the IRS, tax pyramiding occurs when a business accumulates more than one quarter of unpaid employment taxes. It may also occur when a business has an outstanding employment tax liability, so it closes down, and then starts up again within a new entity having a new employer identification number.
As a business owner, you are required to withhold payroll taxes from wages paid to employees. You must then pay those taxes to the IRS. This money is trust fund money that belongs to the government. The IRS does not care what you did with the money aside from the fact that it was not handed over properly and in accordance with the law. The IRS also does not care about the employer's reason for failing to forward the withheld taxes. For example, the company may have been short on cash and therefore opted to borrow the withheld taxes for its own use with the intention of paying it back later. Or, the company owner may have some philosophical difference with the tax laws of the United States. Regardless, the IRS will often go after all responsible persons who have an ownership interest in the company or signature authority over the company accounts. These individuals will be subjected to personal assessments. A Trust Fund Recovery Assessment can be made against every responsible party, amounting to a penalty equal to 100% of the unpaid taxes.
When a business fails to pay its employment taxes, it is also continuing to accumulate federal tax liabilities. Often, the business does not have the ability to pay these new debts. Meanwhile, interest and penalties continue to accrue for the debt attributed to the previous years, making them larger than the newer debts. As a result, the accruing liabilities relating to the unpaid employment taxes is said to resemble a pyramid.
4 Reasons Why Employment Tax Pyramiding Is a Problem for Everyone
- Pyramiding is a problem for an employee because the employee is still responsible for paying taxes even if the employer is not withholding taxes as it is supposed to. Failing to do so can result in penalties and interest, collection actions, or seizure of assets. As such, employees must pay close attention to their paystubs, W-2s, and other tax statements to ensure that the proper taxes are being withheld.
- In addition, employees may not qualify for social security, Medicare, or unemployment benefits if their employers fail to report or pay employment and unemployment taxes.
- Employers face many problems when it comes to pyramiding as well. Employers who do not pay taxes or properly report taxes may face criminal as well as civil sanctions. This may include steep fines or lengthy jail sentences.
- People who are self-employed may also face issues if they are guilty of pyramiding. Self-employed individuals are still responsible for paying federal income tax, Social Security taxes, and Medicare taxes. If the self-employed individual does not do so, he or she may face criminal and civil penalties.
In addition to the civil and criminal consequences that a business owner may face after engaging in tax pyramiding, stricter enforcement actions may also be imposed by the IRS on the business. These may include the following:
- Requiring the business or individual to file tax returns on a monthly basis instead of quarterly.
- Requiring that withheld taxes be deposited into a special bank account within two banking days of paying employees.
- Referring the employer to the Department of Justice for criminal enforcement of ongoing non-compliant tax behavior. If convicted, the employer could face criminal penalties in addition to a fine of up to $100,000.
- Reporting the employer to the Department of Justice in order to have a court-ordered injunction issued that prevents the business from continuing to engage in abuses of the payroll system.
If you are employed by or own a business that has been engaging in tax pyramiding, it is crucial to seek legal assistance to help figure out how to resolve the problem. We have helped many clients move on from difficult tax situations and put these issues in the past. Learn more about the experiences of our previous clients by checking out our client testimonials today.