Payroll taxes collected by employers from employee paychecks and remitted to the government make up more than 70% of all taxes collected. They can also lead to trouble because, especially in hard times, employers can be tempted to use tax withholdings to fund the business.

Advisors and their business-owning clients should be awawre that the federal government has made payroll tax enforcement a sharper priority, tax specialists say.

“In addition to civil penalties, interest and income tax liability, criminal liability can also arise,” said David A. Shuster, managing principal and director of Tax Controversy Services at Friedman LLP’s New York office.

“When employment taxes are not paid, the IRS [investigates] to determine which owners or key employees are responsible for the employer’s failure to comply and looks to collect from those individuals instead,” added Miri Forster, partner and national tax controversy leader at EisnerAmper in Iselin, N.J.

If money intended for payroll taxes is traced to personal use, the IRS reviews 1040 tax return forms to determine if the funds have been reported as income. “If not,” Forster said, “the result could be both employment tax and income tax issues.”

This is an area of the tax code that business owners may not be familiar with, advisors say.

“Personally, liability can arise not only for what was withheld and not paid over to the government but also for what should have been withheld but wasn’t," Shuster said.

Corporate entities do not provide any protections in terms of liability, he added.

“Once the payroll taxes are withheld, they must be paid over,” he said. “If they’re used to pay another creditor of the business, that alone will usually establish the willfulness prong of responsible person liability, making the responsible person personally liable for the unremitted taxes. If a corporate shareholder or LLC member is a responsible person, the form of entity won’t insulate that shareholder/owner from being liable for the entity’s payroll taxes.”

There are situations in which the IRS will work with businesses that have unmet tax obligations, the agency says.

“We may be able to remove or reduce some penalties if you acted in good faith and can show reasonable cause for why you weren’t able to meet your tax obligations,” the IRS says on its website. Hardships that could lead to lesser penalties include fire, casualty, natural disaster “or other disturbances”; inability to obtain records; death, serious illness, incapacitation or “unavoidable absence” of the taxpayer or a member of the taxpayer’s immediate family, the IRS says.

“A lack of funds, in and of itself, is not reasonable cause for failure to file or pay on time,” said the IRS, which notes that businesses can dispute penalties.

Employment tax penalties can add up fast and rules for when to timely deposit payroll taxes are complicated.

“Many employers follow a monthly or semi-weekly schedule for deposits. There are special situations that require a deposit outside of your normal schedule,” Forster said. “For example, for taxes of $100,000 or more accumulated on the same day, deposits are required to be made by the next business day.”

Being 15 days or more late in making deposits results in a penalty of 10% of the unpaid deposit and increases to 15% upon notice and demand by the IRS. “It’s crucial to maintain good records and have procedures in place to know when special deposits are required and how to timely make them outside of the normal payroll deposit schedule,” Forster said.

If you have outstanding employment tax obligations or have recently spotted errors in your payroll compliance, come forward before the IRS comes after you, planners say.

“Even employers with the best intentions can make mistakes,” Forster said, adding that under certain circumstances the IRS allows employers to conclusively resolve their employment tax non-compliance through a closing agreement program. “The IRS may also entertain a request for waiver of penalties."