Question

In order to improve the cash flow of the company, Neal Emerald decided to postpone depositing all employment taxes and 401(k) withheld from his employees as well as the employer payroll tax requirements as well. He told his sales manager, “I’ll pay up before the IRS catches up with me.” What risks does Emerald face by not upholding his responsibility for the collection and payment of payroll withholdings and taxes?

Answer 1

The way Neal is handling this situation is highly unethical and will only solve the cash fow problem in the very immediate term, but can quickly lead to any even bigger disaster if he is not able to make up the funds to pay the employment taxes. Failure to pay the taxes of employees can lead to criminal and civil prosecutions depending on the level of wilfull default. In the given case, the failure of Neal to pay taxes will be considered as wilful default on his part and will be personally liable to a penalty of 100% of the amount of taxes collected but not paid as per Sec. 6672(a) of IRS. Moreover apart from such penalty, Department will also levy a late payment penalty which will be as follows:

1. if you pay one to five days late, the IRS may assess a 2 percent penalty of the total tax due.

2. The penalty increases to 5 percent on payments six to 15 days late and

3. 10 percent on payments 16 or more days late.

Moreover, since it is a wilful default of payment of taxes IRS can also levy jail time to all the persons responsible for such act. Responsible person can be the owner of the company or corporate officer or any other officer who has control over the finances of the company.