The IRS continues to use enforced collection when it comes to unpaid payroll taxes and unfiled payroll returns. Enforced collection can include levying a company’s accounts receivable, equipment, automobiles, and bank accounts. The IRS can also close a business for non-payment of payroll taxes; and, if the business is already closed or has filed for bankruptcy protection, the IRS can look to the owner of the business for collection.
In the case of a corporation, the IRS will look to the person responsible for paying the payroll taxes to collect the unpaid trust funds. This is known as the Trust Fund Recovery Penalty.
For many businesses, facing financial strain can result in payroll taxes not being paid and payroll returns not being filed on time. Unfortunately, these are among the worst things that can happen when a business falls on hard times.
What Happens When a Business Fails to Pay Payroll Taxes or File Payroll Returns
When a business fails to pay payroll taxes on time, penalties and interest start to accrue. If the business also fails to timely file its payroll returns, the penalties increase substantially.
Failure to file a return on time can trigger penalties of five percent per month up to a maximum of 25 percent of the amount due. Add that to other penalties and compounded interest, and you can have a very serious tax problem.
Businesses that are unable to pay in full generally have three options to settle their payroll tax debt: (i) seeking currently non-collectible status, (ii) negotiating an Offer in Compromise, and (iii) negotiating an installment agreement.
1. Currently Non-Collectible Status
In cases where there is little future collections potential, the IRS will suspend collection activity under certain circumstances. This program is not heavily advertised, and is generally considered a last resort. Currently Non-Collectible status is difficult to obtain and requires an experienced attorney who can guide you through the process and negotiate with the government on your behalf.
2. Offer in Compromise
The Offer in Compromise program authorizes the IRS to settle payroll tax liabilities for less than the full amount owed. In order to qualify for the Offer in Compromise program, a business must not be able to pay the liability in full. Business expenses are carefully examined to make sure they are reasonable and necessary.
Future compliance is essential. Even if an offer in compromise is accepted, the IRS can revoke it if the business accrues new liabilities.
3. Installment Agreement
An installment agreement allows a business to pay its liability over a fixed period of time. In the interim, the IRS will cease all collection action (including levies and garnishments) as long as the business makes all installment payments on time and does not accrue additional liability. However, interest and late payment penalties will continue to accrue, and the government can maintain a tax lien until the liability is satisfied in full.
Installment agreements are a convenient method to utilize future cash flow and to pay off liabilities over a fixed period of time. However, the IRS will only grant them under certain circumstances, and it may expect taxpayers to sell certain assets, borrow against other assets, and exhaust potential lines of credit before it will consider an installment agreement.
An experienced tax attorney at RJS Law can assist you in weighing your options and choosing the best path forward. Whether your goal is to pay your tax debt as quickly as possible or to negotiate a minimum monthly payment to increase your financial flexibility, we can help.
Speak with a Payroll Tax Attorney at RJS Law for Free
If you have any questions about your company’s payroll tax obligations or your options for reducing liability for payroll tax-related penalties, we encourage you to get in touch. To speak with one of our experienced payroll tax attorneys in San Diego, Beverly Hills, or Orange County, please call 619-595-1655 or request a complimentary case evaluation online today.