Payroll Taxes Embezzled; Owner Has Huge Business and Tax ProblemsTax Planning
If you have employees in your business, this story should have your attention.
Timothy McCloskey, president and sole shareholder of Brosius, delegated financial responsibility to Kathleen Lawson, his bookkeeper and chief financial officer.
Ms. Lawson embezzled more than $800,000 from Brosius and failed to remit employee withholding taxes to the IRS for 19 quarters (4.75 years). Once Mr. McCloskey became aware of the magnitude of Ms. Lawson’s embezzlement, he knew that he could not continue to keep Brosius in business.
Winding Down Corporate Affairs
He discussed bankruptcy with his lawyer, but circumstances dictated winding down the affairs of the corporation as a better alternative. Mr. McCloskey began paying off creditors, other than the IRS.
He sold company inventory for $240,000 and used this money to pay off a loan to National City Bank, because he had personally guaranteed this debt.
Mr. McCloskey, as president of Brosius, signed and mailed Form 941 returns for the 19 back quarters and paid the taxes and penalties for three of those back quarters. The remaining assessments against Brosius (and soon, against Mr. McCloskey, individually) for penalties, statutory additions, accrued interest, and costs totaled $325,695.
The IRS assessed the 100 percent trust fund penalty for failure to remit withholding taxes. Brosius, the corporation, and Mr. McCloskey, personally, had a fiduciary responsibility to ensure that the payroll taxes were remitted to the IRS on a timely basis. Failure in this regard triggers the 100 percent trust fund penalty on the withholding monies taken from the employees, and in this case it attached to Mr. McCloskey personally as a responsible person.
Mr. McCloskey was able to wind down Brosius in a manner that enabled the corporation to pay more than $828,143 to creditors. But the corporation remitted only $51,302 to the IRS.
Not paying the IRS for the payroll taxes is a big oversight, in terms of both the original failure due to the embezzlement and the subsequent failure after Mr. McCloskey learned of the embezzlement. Now, after all his work winding down the affairs of his corporation, he became personally responsible for paying the remaining payroll taxes to the IRS.
If you own and are active in the business, you are personally responsible for making sure that the payroll taxes are paid. Neither the IRS nor the law allows excuses.
Mr. McCloskey learned that the fraud of his employee does not excuse him or his corporation from paying payroll taxes.
Likewise, Pediatric Affiliates learned that a more than $1 million fraud on their payroll taxes by their payroll service did not excuse the company. See Tax Law Shows No Mercy to Victim of Payroll Embezzlement.
See if you can answer the following question: Are you absolutely, positively sure that your payroll tax money has been remitted to the IRS? Have you seen absolute, physical proof with your own eyes?
- You can’t ask someone and count on that answer.
- You can’t see a report from your payroll service and believe that as absolute proof.
- The fact that the payroll tax amounts were taken from your business bank account does not mean that money was remitted to the IRS.
What, then, is the answer?
It’s simple, really. Examine your account with the IRS. You can see your payroll tax money sitting in your IRS payment account by just looking at your account.
Here’s how this works: First, it’s simple, sure, and free. You register with the IRS’s Electronic Federal Tax Payment System (EFTPS). Once registered, you can see physical proof of your tax payments in the IRS register. The register holds the last 15 or 16 months of your payments.
The EFTPS register is absolute proof. If you see the deposits in the register, you know that your in-house bookkeeper or outside payroll service properly sent the money to the IRS. If the money is missing, the register tells you so.
To check out and register for the EFTPS, click here to get to the EFTPS home page.
If you are not the payroll clerk for your business, you risk embezzlement of your payroll monies. Make sure to check your payroll deposits at EFTPS. It’s an important audit step by you, the owner, to ensure that you are not hung out to dry.
Of course, if your business is large and has the necessary internal controls in place, your risk of embezzlement is minor.
But the one thing to keep in mind is if your payroll monies are embezzled, you get hurt twice. First, you lost the money (unless you can recover it from the embezzler—not likely). Second, you have to send the money to the IRS.
In most cases, if you suffer embezzlement of your payroll taxes, you pay them twice: once to the embezzler and then again to the IRS (probably with penalties and interest).