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Attorneys Can Face Stiff Penalties for Failure to Pay and File Payroll Tax Returns

Law firms are subject to the same payroll tax laws and guidelines as other businesses, along with the same penalties for willfully or unwilfully following those laws. Unlike other business owners, however, law firm owners can be subject to further discipline through the bar. While no Georgia lawyer has recently been disbarred for failure to pay payroll taxes, it has happened in other states. Failure to pay other taxes, specifically income tax, is and has been a reason for disbarment in Georgia.

Failure to Pay Could Be Criminal

Payroll taxes are different from other taxes in that they are held by an employer in trust for employees. Employee income, Social Security, and Medicare taxes are taken out of their checks and then paid by the employer to the Internal Revenue Service and Georgia Department of Revenue. When employers do not remit those taxes to the IRS or state taxing authority, the failure to pay could be considered tax evasion and subject to criminal penalties. At the very least, failure to pay payroll taxes on a timely basis or to file the correct payroll tax forms results in penalties and interest.

The IRS begins by penalizing late-paying employers with fines. If a payment is one to five days late, the fine is 2% of the late deposit. Six to 15 days, the fine increases to 5%. Sixteen days and later incurs a 10% penalty. An additional 15% is added ten days after the IRS sends its first bill, for a total penalty of 25%. Past-due payments also accrue interest.

Unfortunately, the IRS does not consider the reason why a firm or other employer might be late depositing payroll taxes. Even if a firm has a timing issue with a client payment and decides to pay rent first then payroll taxes a few days later when the client money has been received, the IRS still assesses penalties and interest. 

In addition to payroll tax deposits, employers are required to file quarterly payroll tax returns, or Forms 941. The forms report wages paid and tips reported, as well as federal income tax, Social Security, and Medicare taxes withheld on behalf of employees and the employer’s portion of Social Security and Medicare. For each month an employer is late filing this form, the IRS charges a penalty of 5% of the unpaid tax due up to a maximum penalty of 25%.

Trust Fund Recovery Penalty

If the IRS determines that a particular individual at a firm, say a solo practitioner or owner, is willfully responsible for the firm’s failure to pay payroll taxes, it can assess a penalty of 100% of the overdue taxes to that individual. This is known as the Trust Fund Recovery Penalty (TFRP) and is found in Internal Revenue Code section 6672(a). The IRS can and has assessed the TFRP to individuals for willful failure to collect, pay, or attempt to evade payment of payroll taxes.

Attorneys Disbarred

While the Georgia bar rules only specifically refer to failure to pay income tax as illegal conduct adversely affecting an attorney’s ability to practice law and therefore reason for disbarment, other states have disbarred attorneys for evasion of payroll tax. In 2011, a West Virginia attorney was sentenced to 21 months in prison and disbarred due to his conviction for failure to pay firm social security and Medicare taxes of $270,000. In December 2019, an attorney in White Plains, NY, pleaded guilty to 10 years of payroll tax evasion and is awaiting sentencing.

In perhaps one of the more famous income-tax-related disbarments in Georgia, former Atlanta mayor Bill Campbell was convicted of felony tax fraud in 2006 and disbarred by the Georgia Supreme Court later that year.

Have Questions? Call the Experienced Tax Attorneys at Wiggam & Geer

If you are facing a Trust Fund Recovery Penalty or have been levied stiff penalties for late payroll tax payment, let Wiggam & Geer help you navigate the intricacies of appealing to the IRS. Contact metro Atlanta’s top tax and bankruptcy attorneys online or call us at (404) 609-1300.