Embezzlement or Fraud Involved With 941 Taxes

Embezzlement or theft may be a more frequent issue faced by small and medium sized businesses than many people think.  Often office managers or employees will improperly take money or assets from a business.  Although, perhaps not as common as an employee misappropriating monies or assets, I have seen professionals, such as the businesses CPA embezzle or steal money, which when done is typically a much higher dollar amount and more damaging to the company.  One means by which I have witnessed a CPA or professional embezzle monies from a business is through the employment tax (941 tax) process whereby federal tax deposits are paid to the IRS on a weekly or monthly basis.  Below I have provided examples of this embezzlement or fraud scheme, which hopefully can prevent some business owners from falling victim.

One situation whereby I have witnessed a CPA or office manager involved with theft or embezzlement from a company was when the CPA or office manager was preparing the 941 employment tax returns and in charge of making the federal tax deposits.  The scheme was conducted under the following facts & circumstances.  The corporation would run payroll and net payroll checks would be paid to all employees and officers.  A payroll report was provided to the corporation stating gross payroll, net payroll and the total employment tax liabilities.  The correct amount(s) were withdrawn from the corporation’s bank account to pay the tax deposits, but the deposits were not paid to the federal government or state agencies.  The deposits went to another account, usually an account under the control of the third party responsible for the embezzlement or fraud.

Thus, when looking at the bank statements, payroll records and 941 tax returns, everything would appear ok.  The net payroll was paid to employees and the appropriate amount was being withdrawn for tax deposits.  The internal books of the business would be in line.  When preparing the 941 returns, the correct return was provided to the necessary parties or officers for review and signature, but then a zero ($0) 941 was filed or no 941 was ever filed at all.  The business owners can be personally responsible for the trust fund portion of the 941 tax!

You may be asking yourself, how does the IRS catch on, or why did the IRS not catch on?  The IRS will catch on, because in all likelihood the business must issue correct W-2s to employees so employees can file their individual returns.  Eventually, the IRS will see that the W-2s are not matching up with the 941s and the federal ta deposits, but this could easily occur 12-24 months after the fact and thus the fraud could have been ongoing for 24-36 months.  Furthermore, if the individual responsible for the fraud also receives the IRS notices and is responsible for IRS contacts, knowledge to the business owners could be further delayed.

As a business owner, what can you?

  • Making the actual federal tax deposits yourself is the safest manner to prevent this fraud or embezzlement
  • If you do not make the deposits, make sure you obtain receipts of the deposits paid through and check these deposits against the bank withdrawals and applicable documents
  • Make sure the 941s are accurate based upon payroll and ensure they are filed. If filed and a balance is due, you would receive a notice within 15-60 days.
  • Make sure you are receiving all IRS and tax notices.

If you or your business have been the victim of theft or fraud through a similar 941 scheme, please feel free to contact The McGuire Law Firm to discuss your options with the IRS.

CPA Theft CPA Embezzlement

IRS 941 Tax Debt

A 941 tax debt (or employment tax debt) to the Internal Revenue Service is a very serious tax liability.  Form 941 is the quarterly tax return whereby an employer will report wages paid, social security, Medicare and federal income tax withheld.  Often when a business is in a cash crunch, the net payroll will be paid to employees, but the taxes are not paid over to the IRS.  When this occurs, the business begins to accrue a 941 tax debt.

The reason a 941 tax liability is so serious is because individuals related to the business can be held personally liable for the trust fund portion of the tax debt.  The trust fund is the amount of social security and Medicare tax and federal income tax withheld from employees.  When not paid to the government, the IRS will determine who the willful and responsible parties are, and propose the personal assessment of the trust fund through the Trust Fund Recovery Penalty.  Once assessed, the IRS will look to collect trust fund from the individuals as well as the business and thus the business and the assessed individual or individuals may be paying on the same tax at the same time.  The Trust Fund Recovery Penalty is non dischargeable through bankruptcy and is considered joint and several liability and thus the IRS could collect the entire amount of the liability from one of the assessed individuals.  For example, say John and Jeff own J Squared, Inc and there is a $100,000 trust fund liability of which both John and Jeff are personally assessed.  John has $100,000 in a bank account and the IRS levies John’s bank account.  The trust fund would be paid from such levy, and John would have paid all of the trust fund debt by himself.  The IRS is not required to collect the trust fund in equal amounts or pro rata per an individual’s ownership in the business. It would be up to John to collect a portion from Jeff either voluntarily or through court action.

If your business owes 941 taxes, or you have been personally assessed the Trust Fund Recovery Penalty, speak with a Denver tax attorney at The McGuire Law Firm.  As a tax attorney Mr. McGuire has represented many businesses that owed 941 taxes to the IRS and successfully resolved such debts.  Further, Mr. McGuire has defended many individuals of whom the IRS was looking to personally assess the trust fund and has successfully resolved many individual trust fund debts if the trust fund was personally assessed.  Schedule a free consultation with a tax attorney in Denver by contacting The McGuire Law Firm.

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Video on IRS Trust Fund Recovery Penalty by Denver Tax Attorney

Quite often a client will be in my office and they will state that their business has a 941 tax debt (employment tax debt).  This generally occurs because the business is tight on cash flow and thus the employees will be paid their net checks, but the taxes withheld will not be paid to the IRS as they are supposed to be.  When this occurs, a portion of the taxes known as the trust fund can be personally assessed to one or multiple individuals.  That is right, individuals can be personally responsible for certain business taxes and often a business owner is shocked (and scared) to learn this fact.

The trust fund portion of the 941 tax debt is the employee’s portion of the social security and Medicare tax and the employee’s federal withholding tax.  Thus, if you looked at a 941 tax return, and no tax payments had been made, you could multiply the social security and Medicare tax by 50% and add this amount to the total federal income tax withheld and this would be the trust fund amount for the applicable quarter.  This is the amount that individuals can be held responsible for.

When a 941 tax debt is due, a revenue officer from the IRS will conduct an interview known as the 4180 Interview to determine the willful and responsible parties.  The willful and responsible parties will receive a proposed assessment of the Trust Fund Recovery Penalty.  You have 60 days from the date of the proposed assessment to protest the assessment, and if the assessment is not protested, the individual will then have a tax debt under their social security number.  Thus, the IRS could file a tax lien that would attach to your personal assets, and can collect the trust fund from the individual even if the business is making payments towards the tax debt.  Therefore, a 941 tax liability is a very serious matter, and I would recommend that any business with a 941 tax debt that cannot be immediately paid, speak with a tax attorney.  You can speak with a Denver tax attorney at The McGuire Law Firm through a free consultation!

The video below has been prepared by a tax lawyer at The McGuire Law Firm to provide additional information regarding the IRS Trust Fund Recovery Penalty.

Video on IRS Trust Fund Recovery Penalty by Tax Attorney in Denver Colorado

If your business owes 941 tax debts to the IRS you may have been or may be personally assessed the trust fund portion of the 941 tax debt.  If so, a tax attorney at The McGuire Law Firm can assist you in resolving these matters.  As a tax attorney, John McGuire has assisted and resolved many 941 tax debts for businesses and trust fund assessments for individuals.  The video below discusses the trust fund recovery penalty.


Contact The McGuire Law Firm to schedule your free consultation with a Denver tax attorney!  The McGuire Law Firm has offices in Denver, Colorado and Golden, Colorado.  Call today!