Note: This post is not a request for legal advice. I’m only looking for statutes or case law that may apply.
I’m trying to get a sense of the tax issues (fines, penalties, etc.) for a couple of related circumstances.
Scenario 1: Suzie Q is a former employee of The Company LLC. She receives a W-4 for her salary/wages at the end of the year, and gets ready to file her taxes. Before she does, she is told by a current employee that the LLC may not have actually sent to the feds the amount that is shown as withheld on her W-4. Suzie didn’t get any more net pay that is shown on the W-4, though, and she has the pay stubs and bank deposit records to demonstrate it.
If Suzie goes ahead and files her tax return anyway and the IRS catches the discrepancy, who gets penalized - Suzie, the LLC, or both?
Scenario 2: Just as above, only this time Suzie also happens to be a member of the LLC, with 2% of the shares, but had no operational responsibilities with respect to company bookkeeping. Does the liability issue change?
Again, I’m not looking for advice, just some background information to understand the issues involved. Thanks.
In Scenario 1 Suzie is off the hook. LLC is responsible for forwarding any tax withholdings. The W2 itself should serve as evidence that the company took the money.
I don’t know if Scenario 2 changes anything, but I doubt it. Maybe she’d be liable for 2% of the withholdings, but it seems to me she can make a strong case that she had no part in or knowledge of the failure to remit.
We (where I work) actually deal specifically with tax cases like this- we’re the ones who clean up the employer’s mess.
In the most recent case I can think of, our client owns a body shop with 30 employees. He took all of the withholding and bought himself a boat. Nice, right?
The IRS caught on when they realized they were getting all kinds of messed up returns from his employees. After an investigation, they realized that employer hadn’t been paying any taxes (personal or business) for years. In the end, they decided he owed $3,000,000.
Needless to say, the employees were completely off the hook. After all, how could they be made liable?
The boss, on the other hand, is about to have his business seized (I was there when the five IRS agents came in with their clip boards and were noting the exits and how they lock/ whether or not they can be chained up :eek: ).
At my former job, that exact situation happened. The company properly took out the withholding from each employee and never sent it on to the IRS or the state (nor did they remit unemployment taxes, etc).
Although we had a heck of a time getting a W2 from the company, once we did we submitted it with our return to the IRS and promptly got our refund. The owners of the (now defunct) company are in one heck of a mess with the IRS and state Dept of Revenue though!