Do You Have an IRS Payroll Tax Debt?

The IRS will often make an unannounced visit to a business with unpaid employment tax liabilities. This visit is legal, but you don’t have to invite the Revenue Officer past the public area of your business, unless they have permission to enter by a court order, which is rare. You also don’t need to make promises or share any detailed information.

During this visit the IRS officer may deliver a Final Notice of Intent to Levy.

You should let the Revenue Officer know that you will be working to answer the IRS questions through a professional. If you don’t yet have an IRS tax expert working on your case, retain one as soon as possible after receiving notice — it is very important not to miss deadlines when it comes to unpaid IRS employment tax withholdings.

The IRS describes Revenue Officers as “civil enforcement employees who work cases that involve an amount owed by a taxpayer or a delinquent tax return. Their role involves education, investigation, and when necessary, appropriate enforcement.” This definition is accurate but fails to convey how Revenue Officers execute their roles in practice.

IRS Revenue Officers are primarily focused on the investigative and enforcement aspects of their responsibilities. They are looking to determine how much a taxpayer truly owes and how much they can realistically collect on behalf of the IRS.

In their investigative capacity, IRS Revenue Officers are empowered to visit a taxpayer’s home or business and contact the taxpayer directly. They will issue requests for information that must be addressed by very specific deadlines. When information is not provided voluntarily and by deadline, the officer can issue a subpoena.

In their enforcement capacity, the IRS Revenue Officer will use strong collection actions to elicit prompt payment of the payroll tax debt. Whether through a payment arrangement or a levy, the officer is motivated to collect and close the case.

A levy is a seizure of bank accounts and other assets — in this case, those associated with the business. A levy of your business can include seizure of receivables, vehicles and equipment, as well as accounts receivable. The Final Notice of Intent to Levy provides 30 days within which to dispute the intent to levy.

It is essential to respond to the Final Notice of Intent to Levy within 30 days. If you believe a mistake was made, provide proof that the tax withholdings were paid in full.

If you are aware that your business legitimately owes the IRS, consult a licensed tax professional for advice on the best strategy for your business’ tax debt situation.

A tax professional may recommend filing a request for a Collection Due Process Hearing (CPD). A CPD prevents the IRS from imposing the levy against your business while you negotiate a solution to the tax debt. It also transfers your case to an IRS appeals settlement officer.

Trust fund taxes are taxes that employers hold in trust for their employees. Any taxes that you withhold from employees’ paychecks, and which are due to the IRS, are trust fund taxes. Trust fund taxes include income tax and employee contributions for Medicare, and Social Security payments.

Non-trust fund taxes are the Social Security and Medicare contributions that employers must match against their employees’ contributions. The IRS will generally hold businesses responsible for non-trust fund taxes, rather than individuals. That means these taxes are not included in the Trust Fund Recovery Penalty for most businesses. However, if you are self-employed or the sole principal of an LLC, you may be held liable for non-trust fund taxes as well as trust fund taxes.

When it comes to trust fund taxes, the IRS can seek to collect these back payroll taxes from the business or anyone within the business deemed responsible for financial operations. This can include the owners, officers and employees with financial control over the business. The liability for these taxes can be divided between the business and individuals, up to 100% of the trust fund amount.

There is no exact formula for calculating what portion of the taxes that are owed are Trust Fund. Each business and payroll cycle will vary depending on the withholdings of the employees of the company. A general rule of thumb is that when a Trust Fund Recovery Penalty is assessed, 60%-70% of the debt will be assessed to the responsible parties as an individual.

IRS Revenue Officers are motivated to expedite the payments and resolve the payroll tax liability as quickly as possible. 12-24 months is a typical timeframe for past due payroll tax Installment Agreements.

There are times when the IRS will forgive back payroll taxes. The debt is often settled for less than the initial amount owed, but only when the business is no longer operational, or the Trust Fund Recovery Penalty is assigned personally to the responsible taxpayers.

If you qualify, an Offer in Compromise is often the best option for resolving payroll tax debt. An OIC is an agreement with the IRS to settle the debt for less than the amount owed. Our Senior Tax Consultants can discuss whether submitting an OIC is a viable option for dealing with your payroll tax debt.

If an IRS financial investigation reveals that your business is unable to satisfy the debt quickly enough, the Revenue Officer will initiate a trust fund penalty investigation. The IRS will seek repayment from those individuals who are deemed responsible for the payroll tax debt.

In the case of a financial investigation, the IRS Revenue Officer will issue a Proposed Assessment of Trust Fund Recovery Penalty. If you are named in the proposed assessment, you have 60 days within which to file an administrative appeal with the IRS. Failing a successful administrative appeal, you can later appeal to the U.S. District Court.

The IRS will initiate collections against you for trust fund taxes, just as if you owed personal back taxes. If the IRS asserts the penalty against you, they can take action to collect against your personal assets through federal tax liens, levies and seizures.

In some cases, the debt can be forgiven through bankruptcy, but bankruptcy is not a universal solution to payroll tax debt and trust fund penalties. It’s also important to note that bankruptcy will affect your credit rating for 10 years.

When the Trust Fund Penalty is assessed, a portion of the debt is transferred out of the business name, to the responsible taxpayer as an individual. The remaining portion of the debt remains owed by the business itself.

Bankruptcy for payroll taxes may require a two-pronged approach, assessing both the ability of the business and the individual to pay. There are different requirements for how taxes are treated in cases of business and personal bankruptcy.

There are times when filing for bankruptcy may be the best option, but our goal is to make you aware of the alternatives available for resolving your payroll tax liability.

Yes. There is a 3-year statute of limitations on IRS investigation of the trust fund recovery penalty. That means individuals can only be held personally responsible if the IRS asserts the penalty within three years of the tax debt assessment.

However, the statute of limitations for unpaid federal payroll taxes is 10 years. So, the business will continue to be liable for unpaid payroll taxes long after the prospect of a trust fund recovery penalty has passed.