As a Maryland business owner with a company large enough to have employees, correctly managing payroll taxes is essential. When employers fail to fulfill their obligations relating to payroll employment taxes, the Internal Revenue Service (IRS) can pursue civil fines—with penalties of up to 100%—or even criminal prosecutions for serious cases of payroll-related tax fraud.
At the same time, a business owner must also withhold payroll tax to cover Maryland state and local income tax. And crucially, the different counties have different requirements, depending on the residence of their employees. For example, the local income tax rate for an employee living in Baltimore or Rockville, Maryland, is 3.2%, while the rate for an employee in Annapolis or Frederick will depend on their salary.
THREE YEARS: THE GENERAL TIME LIMIT FOR FEDERAL PAYROLL TAX LIABILITY
The general rule is that the IRS can audit a business's tax returns for up to three years after the April 15 deadline of the relevant tax year. After that, the statute of limitations is tolled.
However, for employers filing a Form 941 every quarter, effectively, for the first and second quarters, the employer has extra months of potential review tacked on to the filing.
THE EXCEPTIONS TO THE THREE-YEAR-RULE
First, some employers who applied for an employee retention credit (ERC) during the COVID-19 pandemic have a longer statute of limitations for filings relating to the ERC. At this point, it appears that employers who filed for an ERC claim relating to the third and fourth quarter of 2021 are subject to a five-year statute of limitations for that filing.
There are also other exceptions, depending on the issue with a return.
Additionally, the three-year audit period is intended to cover errors, not outright tax fraud. If an employer never filed a return, or the IRS alleges the employer committed tax fraud, there is no statute of limitations. The IRS can pursue that allegation at any time.
IRS COLLECTIONS VS ASSESSMENT
Business taxpayers should understand that the three (or five) year statute of limitations only applies to the filing of taxes. The same period does not apply to collections of back taxes. Regarding collection, the general rule is that the IRS can collect taxes for 10 years. However, the ten years can be extended if the taxpayer agrees to that while negotiating a payment plan. The running of the 10-year period is also tolled if the taxpayer files bankruptcy.
And famously, in the case of Beeler v. Commissioner, a tax court upheld the IRS action requiring that an employer pay the unpaid tax 30 years after the fact.
STATE OF MARYLAND
Business taxpayers should also know that Maryland recently implemented a 20-year statute of limitations for tax liabilities.
Therefore, an employer is still liable for Maryland State tax liabilities for 20 years from the time the tax was assessed. In some instances, the tax liability can last longer than 20 years.
AN EXPERIENCED TAX ATTORNEY CAN MAKE ALL THE DIFFERENCE
As a business owner, filing taxes may be the last item on your to-do list. However, tax issues—especially those involving employees—can financially make or break a business. Maryland tax attorney Gabaie & Associates has offices in Baltimore, Annapolis, Rockville, and Columbia, and Juda Gabaie specializes in helping business owners with taxes. We can review your current employment tax liability, help you work with the IRS to resolve any delinquencies and come up with a plan to avoid future issues.