When a business finds itself in financial distress, it’s tempting to postpone making deposits for payroll withholding and sales tax collections and use the funds to pay other bills.
This is a red flag that the business probably won’t survive very long.
The money collected for payroll taxes and sales taxes is considered to be held “in trust” for government agencies. For these items, the business is operating as an “agent”.
The penalties for late payment and failure to pay these “trust fund” taxes are significant, and they can’t be discharged in bankruptcy. Criminal penalties can also apply.
On December 6, 2023, Thomas Moford, who operated a local concrete business, was sentenced to 15 months in federal prison for failure to pay employee trust fund taxes and failure to file federal income tax returns.
Years ago, I met with a business owner who was in a financial bind because his bookkeeper didn’t make payroll tax deposits and took the money for herself. He didn’t use a payroll service. This is not an unusual situation for small business owners who depend on their bookkeeper or internal accountant and don’t have financial statement audits. (Consult with your business insurance broker about whether you should have an employee dishonesty bond. Once an employee theft happens, it’s too late to recover.)
As a CPA, I encouraged clients to use a payroll service to process their payroll and make payroll deposits. I believed that would provide some comfort to know these items would be timely taken care of.
That isn’t always true. In March, 2013, payroll service Accupay, Inc. closed its business. The business owners took the money intended for the IRS and spent it themselves, causing millions of dollars in losses for their customers. The IRS went back to the owners to collect the unpaid taxes plus penalties. Accupay, Inc. owners Kevin Carden and his wife, Beverly Carden, were sentenced to six years and five years, respectively, in prison for wire fraud.
As a precaution, business owners should periodically check their accounts at tax agencies to assure their deposits have been recorded and there are no unpaid balances.
If your business isn’t up to date on tax filings and payments, consult with a tax attorney that deals with tax collection issues.
It might be time to close the business to “stop the bleeding.”