One of the most serious tax violations a business can commit is failing to remit withheld employment taxes to the IRS. When companies withhold federal income tax, Social Security, and Medicare taxes from employee paychecks but don’t submit those funds to the government, the IRS can impose what’s commonly known as the 100% penalty.
This penalty falls under the Trust Fund Recovery Penalty (TFRP) and is called the “100% penalty” because the entire unpaid amount can be assessed against responsible individuals—not just the business itself. While many business owners believe that corporate structures shield them from personal liability, employment tax fraud pierces that corporate veil, allowing the IRS to go after individuals who controlled payroll decisions.
To avoid severe financial consequences—or even criminal charges—it’s critical to work with fraud tax services that specialize in identifying risks and ensuring full compliance with employment tax laws.
Who Can Be Held Responsible?
The IRS doesn’t just hold businesses accountable for unpaid employment taxes—it holds individuals personally liable if they are considered “responsible persons.” A responsible person is anyone who:
- Has control over collecting, accounting for, and paying federal payroll taxes, and
- Willfully fails to submit those taxes to the IRS.
This can include:
- Business owners, officers, or directors
- CFOs and financial managers
- Payroll personnel or HR staff
- Employees with check-signing authority
- Third-party advisors, lenders, or accountants (in some cases)
Even volunteer board members of nonprofit organizations and executors of estates can be considered responsible persons if they had knowledge of unpaid taxes and the authority to decide whether to pay them.
One of the best ways to ensure compliance and protect yourself is by consulting fraud tax services that can review your company’s payroll processes and prevent tax issues before they escalate.
Willful Nonpayment: A Costly Mistake
The IRS defines “willful” nonpayment as any intentional, voluntary, or knowing failure to remit payroll taxes. Ignorance or negligence isn’t a defense—even if you didn’t personally authorize payroll tax payments, you could still be liable if you had control over financial decisions.
For example:
A CFO learns that payroll taxes are delinquent but doesn’t take action. Since the CFO had the authority to pay those taxes but allowed the company to use funds for other expenses, they can be held personally responsible.
A vice president has limited financial authority but signs payroll tax reports. Even if they didn’t oversee tax payments, the IRS can argue that signing payroll forms means they had enough control to be responsible for compliance.
A business owner assigns check-signing authority to someone else to avoid liability. The IRS sees this as a deliberate attempt to evade responsibility, meaning the owner can still be penalized.
Since proving you’re not a responsible person can be time-consuming, expensive, and difficult, companies should work with fraud tax services to prevent these issues before they arise.
The Real-World Consequences of Payroll Tax Fraud
The IRS aggressively pursues businesses and individuals that fail to remit payroll taxes, and the penalties can be devastating. Below are real-life cases where individuals faced personal liability, financial ruin, and even prison time for employment tax violations:
Case #1: CEO and CFO Held Personally Liable
A CFO discovered that the company was years behind on payroll taxes and notified the CEO. They informed the board, but despite having enough funds, the company didn’t pay the overdue taxes. When the CEO and CFO were fired, the IRS assessed the 100% penalty against them both.
Result: The courts ruled that they were responsible persons who had willfully allowed payroll taxes to go unpaid—making them both personally liable for the full amount.
Case #2: Vice President Found Liable Despite Limited Authority
A 40% stockholder and VP had an agreement that he wouldn’t control corporate finances. However, he occasionally signed payroll checks and IRS tax forms. Despite his limited financial role, the IRS determined that his small financial decisions were enough to classify him as a responsible person.
Result: The court found him liable for the 100% penalty—even though he didn’t handle finances on a daily basis.
Case #3: Construction Company President Sent to Prison
A construction company president withheld employment taxes but used those funds for personal gain instead of paying the IRS. The Department of Justice ruled that he had gained an unfair advantage over competitors and caused significant harm to the U.S. Treasury.
Result: The business owner was sentenced to 18 months in prison and ordered to pay $677,350 in restitution to the IRS.
These cases illustrate the severe financial and legal consequences of failing to remit employment taxes. Working with fraud tax services can help prevent these types of mistakes by ensuring businesses remain compliant with IRS regulations.
How to Avoid IRS Penalties and Personal Liability
If you’re a business owner or executive, you don’t want to find out the hard way that you’re personally liable for unpaid employment taxes. Here are some steps to safeguard your business:
- Ensure timely payroll tax payments – Set up an automated system to remit payroll taxes to the IRS on time.
- Keep accurate financial records – Maintain clear records showing that withheld taxes were properly accounted for and paid.
- Monitor payroll tax compliance – Regularly review tax filings to ensure all required forms (e.g., Form 941) are submitted.
- Be cautious when delegating financial authority – Even if someone else handles payroll, you can still be held liable if taxes go unpaid.
- Work with fraud tax services – Consulting a tax professional can help ensure that your business follows IRS regulations and avoids penalties.
Don’t Let Payroll Tax Issues Put You at Risk
The IRS takes employment tax violations very seriously, and businesses that fail to remit payroll taxes can face severe financial penalties and criminal charges. If you have any control over your company’s finances, you could be personally liable—even if you’re not the owner.
At Burton McCumber & Longoria, we offer fraud tax services to help businesses stay compliant and avoid costly IRS penalties. Our team of experienced tax professionals can:
- Review your payroll processes to identify risks
- Ensure compliance with IRS tax regulations
- Help you prevent worker misclassification issues
- Provide expert guidance on tax fraud prevention
Contact Burton McCumber & Longoria today to protect your business and personal assets from IRS penalties!
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