Payroll Tax Trouble? What You Need To Know

Business owners beware! Fall behind on filing or paying your payroll taxes and you will discover that the IRS is suddenly very interested in talking to you…and it doesn’t promise to be a pleasant conversation!

Payroll taxes include your employee’s tax withholdings — their tax obligation – which makes your failure to pay tantamount to stealing in the eyes of the IRS. Enforcement is swift and penalties are far more severe.

It is not at all uncommon for business owners to lose assets – bank accounts, equipment, even buildings – as the IRS seizes them to settle debt.

Could you stay in business if this happened to you? Many business owners can’t: losing significant assets to the IRS has forced more than one owner to shut the doors – permanently. What happens to your family then? What happens to your employees? Can they afford to lose their jobs any more than you can afford to lose everything?

Exercise extreme caution if you’re contacted by the IRS about delinquent payroll taxes. Remember, they have absolutely no interest in making sure that your business stays open! You have to be prepared to protect your business! Get the help you need to resolve payroll tax problems!

All IRS Payment Agreements Are Not Equal

By Matthew J. Previte CPA MST
July 7, 2011

If you owe back taxes to the IRS, you have undoubtedly wondered how on earth you’re going to get a mountain of back IRS taxes off your back so you won’t have to live in fear anymore. Living with IRS tax problems is stressful and can cause many problems in your life. One of these IRS tax problems is having an IRS tax levy placed on your wages or bank accounts which leaves you with little to no money to live on. An IRS tax lien can also be filed against you in the public record (usually the county recorder or registry of deeds) which not only lets the world know about your IRS tax problems but severely damages your credit rating by a good 100 points or more, leaving you unable to get a loan. So what can you do to resolve your IRS tax problems?

Although Offer In Compromise is advertised heavily on late night TV, it is rarely an option for most people with back IRS tax debts. Roughly 95% of delinquent taxpayers with IRS tax debts do not qualify for the IRS Offer In Compromise program. Unfortunately, these late night TV hucksters tout the OIC as the magical cure-all for your IRS tax debt woes. There is an old saying, if it sounds too good to be true, it probably is. And so it is with the Offer In Compromise program. Although my tax resolution firm has filed many Offers In Compromise over the last 16 years, most of our clients who owe large back taxes to the IRS do not qualify. Simply put, they have too much equity in assets (bank accounts, houses, retirement accounts, etc) and/or cash flow (what’s left over after what the IRS allows for basic living expenses) to qualify. So that begs the question, what are my options?

While bankruptcy can sometimes be a good option, we will leave that discussion for another article (see archives for February 2011). Short of running out the statute of limitations on collection, which is generally ten years, or hitting the lottery or inheriting a boatload of money and paying off the IRS tax debts in full, the only option left is an installment agreement. However, not all installment agreements are equal.

The IRS has two different types of installment agreements to pay off back taxes. The first type is a Full Pay Installment Agreement. In this type of IRS installment agreement, the monthly payments are sufficient to pay off the back taxes (plus any penalties and interest that accrues) until it is paid off in full. With this type of IRS installment agreement, your payments will full pay the back IRS tax debts, as well as all penalties and interest accruing on the debt, within the statute of limitations on collection. The statute of limitations on collection is generally 10 years. However, there are numerous actions that can extend the time the IRS has to pursue collection action (liens, levies, seizures, etc). We will leave that to another article to discuss.

The second type of IRS installment agreement is called a Partial Pay Installment Agreement. Under this type of IRS installment agreement, the monthly payment is insufficient to pay off the back taxes plus accruing penalties and interest by the collection statute expiration date. What does this mean in plain English? Well, it means that you make payments until the statute of limitations on collection (in IRS speak the “CSED”) runs out. So if at the collection statute expiration date there is $10,000 of unpaid back tax debt, it expires to zero and you do not owe it anymore. Nice huh? There is one catch however. As part of the terms of the Partial Pay Installment Agreement, the IRS will review your financial condition every two years to see whether or not your financial condition (i.e. your ability to pay more) has improved. If it has, they will require a higher payment if your financial condition shows you can afford to pay more towards the back tax debt. The downside of this type of installment agreement is it is possible that in the future your financial condition improves and the new monthly payment required becomes sufficient to full pay the back taxes, penalties, and interest by the collection statute expiration date. In other words, it’s possible to start out with a Partial Pay Installment Agreement and end up with a Full Pay Installment Agreement. The positive aspect of a Partial Pay Installment Agreement is that if your financial condition does not improve enough or at all, you could still end up paying less than the full amount owed and end up with a large balance of unpaid back taxes expiring to zero at the collection statute expiration date.

With all IRS Installment Payment Agreements, your financial condition is reviewed via a Form 433-A and/or 433-B depending on whether your tax issues are personal or business tax debts. Individuals and sole proprietorships use the Form 433-A while corporations, partnerships, and LLCs use a Form 433-B. If you owe personal taxes and have income on your personal tax return from a flow through entity (S corporation, partnership, or LLC treated as an S corporation or partnership), you may have to submit both the Form 433-A and the Form 433-B to get your installment payment agreement approved.

There are strategies to minimize your monthly payment amount but that will be discussed in a future article. Also, just because the IRS initially denies your IRS installment payment agreement does not mean you should give up. Many initially rejected IRS installment payment agreements were later accepted upon filing an Appeal to the IRS Appeals Division. Persistence and perseverance are key to obtaining a fair IRS installment agreement that you can live with.

Frustrated Taxpayer Saves $30,000 Ending 10 Year IRS Ordeal

Peter was a silent partner who had invested in a business that had failed some ten years earlier. Due to an incompetent business partner who mismanaged the business, payroll taxes were left unpaid that Peter did not become aware of until many years later when the IRS came knocking at his door. Because the business was a general partnership, Peter was held personally responsible for the unpaid payroll taxes even though he had little involvement in the day to day operations of the business. Peter filed his own Offer In Compromise and thought his tax problem would soon be over. Unfortunately, the IRS thought otherwise. After patiently waiting for nearly a year, they rejected his Offer. Frustrated, he appealed their decision hoping to resolve his problem once and for all. Two years passed and the Offer still had not been accepted. After nearly three years of going it alone, Peter gave up, got smart, and called our firm for help. Our firm determined an Offer was a viable solution but would have to be renegotiated due to many technical errors in the drafting of his Offer. We determined that an abatement of the penalties assessed would achieve the same result in 9 to 21 months less time and for approximately the same cost to refile and renegotiate a new Offer. In about two months time, we negotiated a settlement agreement abating $30,000 in penalties and ending Peter’s problem for good. He was extremely happy it was all over and he could get on with his life.