Falling behind on payroll taxes is different from missing payments on other bills or even other types of taxes. Payroll taxes involve money withheld from employees’ paychecks, which the IRS expects employers to hold in trust until their next scheduled deposit date.
If you’re facing a payroll tax problem, you might be wondering if you can handle payroll tax debt without the help of an attorney, CPA, or other tax professional. In some cases, the answer is yes, but the stakes are high and there are significant risks depending on the nature of your payroll tax problem. In these latter situations, contacting a tax professional from Seattle Legal Services, PLLC is something to consider.
Key Takeaways
- Payroll tax debt is considered trust fund tax debt, so the IRS handles it more aggressively than other types of unpaid taxes.
- In certain cases involving a small debt you can pay in full, you may be able to handle your payroll tax issues alone.
- If there’s a Revenue Officer assigned to your case or a possibility of a Trust Fund Recovery Penalty, it’s crucial to work with a tax attorney.
- There are no quick fixes with payroll tax debt—you need to address it head-on to avoid personal liability.
Why Payroll Debt Is Especially Serious
Payroll taxes are considered trust fund taxes. This is because they’re taxes that business owners collect from their employees and hold onto until the next payroll tax deposit date. At which point they must be handed over to the IRS.
Failing to pay is viewed not just as failing to pay taxes, but improperly retaining employee wages and government funds. Due to how seriously the IRS takes trust fund taxes, they can assess the Trust Fund Recovery Penalty (TFRP) to hold individuals personally liable for unpaid payroll taxes.
While a business closure may shield individuals from having to pay some business taxes, that isn’t the case with payroll taxes. Payroll tax liability can follow the individuals deemed responsible for the missing tax payments.
There’s also the fact that IRS revenue officers can play a significant role in the collection of payroll taxes. Unlike automated notices and collection efforts, collection efforts by revenue officers happen much faster and are much more aggressive.
When DIY Resolution May Be Possible
Although payroll tax debt is serious, there are cases in which you may be able to resolve it on your own. For example, the balance you owe is small and you’re capable of paying it back while staying current with your other payroll tax obligations. In this situation, you may be able to pay the balance, pay the associated penalties, and avoid further payroll issues by staying compliant.
You may also be able to handle things without consulting a tax professional if you’re in the early stages of a payroll tax problem. For instance, you’ve just received a Federal Tax Deposit (FTD) alert, but there has not been any talk of the Trust Fund Recovery Penalty. If you can get caught up quickly, provide a reasonable explanation for falling behind, and stay compliant going forward, you may be able to put this behind you.
Practical Steps Owners Can Take Early in the Process
If you’re committed to catching up on your payroll taxes and keeping your business in good standing with the IRS, take these steps to protect yourself and your business:
- Respond to IRS notices early; the IRS may be less likely to take aggressive collection actions if you show a good-faith effort to comply.
- Catch up on current deposits—the IRS prioritizes present compliance.
- Cooperate with revenue officers. For best results, work with them instead of trying to evade them.
- Maintain records to prove your role in the business. If a Trust Fund Recovery Penalty is suggested, you may need to prove that you aren’t responsible/liable.
It’s important to note that even if you can solve your payroll issue without a tax professional, that doesn’t mean that you have to do so. Even in the early stages of payroll tax noncompliance, many business owners choose to work with an attorney to minimize the risk of personal liability as much as possible.
Seek Professional Assistance If You Recognize These Red Flags
Wondering if it’s time to consult with a tax professional? Here are some potential warning signs:
- The IRS requests that you attend a Form 4180 interview, as this is what they use to determine who should be charged the TFRP.
- The business can’t stay current with new payroll tax deposits while making progress on back taxes.
- The IRS has already imposed a lien or levy.
- Disputes arise about who is responsible for the payroll tax problems of the business.
- Potential responsible parties take steps to shield their personal assets from the IRS.
Being unable to catch up on unpaid payroll taxes while staying compliant with current payments is a sign of serious financial troubles within the company. Unless you take immediate action to get caught up and protect yourself from personal liability, the TFRP may be next. This isn’t a good position to be in, but it doesn’t mean that you’re out of options. You can work with an experienced tax attorney to figure out how to proceed.
Myths and Misconceptions About Payroll Tax Debt
While many business owners recognize the importance of payroll tax compliance and what’s at stake if they fall behind, some assume that this is an easy issue to handle. There are many myths and misconceptions floating in business circles, leading business owners to take unnecessary risks.
Some of these myths include:
- You can settle the debt for a fraction of what you owe: The IRS won’t consider an offer in compromise from a business that owes trust fund taxes unless they either pay the trust fund tax portion of their debt or the TFRP has been assessed.
- You can just apply for Currently Not Collectible (CNC) status: It’s difficult to get CNC status—the IRS has an extensive application process, and they only grant this option to businesses for whom paying tax debt would cause undue hardship. Even if a business is considered currently not collectible, the Trust Fund Recovery Penalty can still be used to hold individuals liable.
- You can just shut the business down: Payroll tax debt doesn’t go away when a business closes. The IRS will assess the Trust Fund Recovery Penalty and recover what they’re owed that way.
- You can seek assistance from the Taxpayer Advocate Service or a Low Income Taxpayer Clinic (LITC): These organizations help low-income taxpayers and those whose problems haven’t been resolved via normal IRS channels. They’re not there to help businesses with ongoing payroll tax issues.
The Role of Professional Representation
Tax attorneys provide substantial support and legal options to businesses facing payroll tax issues. Your lawyer has an in-depth understanding of IRS procedures and strategies, and ideally, you’ll choose an attorney with significant experience handling payroll tax issues.
Furthermore, communicating with the IRS via an attorney helps you avoid implicating yourself as a responsible party. While statements you make to your attorney are protected via attorney-client privilege, the same isn’t true for statements you make directly to the IRS or other non-attorney tax pros.
A tax lawyer can help negotiate realistic repayment terms on your behalf, protect your personal assets from the TFRP, and avoid common—and expensive—missteps that business owners often make when trying to represent themselves before the IRS.
We usually recommend having a tax attorney when you’re struggling with payroll taxes. Professional representation is especially critical when a revenue officer has been assigned to your case or the TFRP is a possibility. In these scenarios, there’s a very real risk of personal liability that will follow you regardless of the status of your business.
Balancing Cost vs. Risk
Coming back to whether or not you can handle past-due payroll taxes without a tax professional, it comes down to analyzing cost versus risk. Handling a payroll tax issue on your own may save you in upfront fees, but it can ultimately cost you much more.
If you mishandle your case and get hit with the TFRP penalty, you could be personally liable for a tax debt of tens or hundreds of thousands of dollars. This penalty doesn’t go away in bankruptcy, and the IRS will pursue it aggressively until it’s paid in full.
You also have to look at the specifics of your situation. There’s a difference between a small one-time balance you racked up accidentally and a growing payroll tax debt that you can’t see a way out of. For many business owners, professional help is less costly than repairing the damage that comes with mishandling a tax issue.
Payroll tax debt is one of the riskiest areas to handle your own tax concerns. You may manage it alone if your debt is small and easily paid off—but once liens, levies, and TFRP investigations are involved, there is a lot at stake. With the help of Seattle Legal Services, you can navigate your payroll tax issues, get caught up and paid off, and set yourself up for future compliance. Schedule a consultation now by calling us at 206-536-3152 or reaching out online.
Frequently Asked Questions
What is the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty is equal to the amount owed in trust fund taxes. The IRS determines which individuals are “responsible parties” for the purpose of tax payment, assesses the penalty, and holds them personally responsible for paying it.
How fast does the IRS act on unpaid payroll taxes?
The IRS acts very quickly on unpaid payroll taxes. It uses the Federal Tax Deposit Alert Program to identify businesses at risk of falling behind and sends them a notice. In some cases, the alert is sent even before a business misses a deposit.
I’m not the business owner—can I still be held liable?
Yes. It’s not just business owners who can be charged the Trust Fund Recovery Penalty. The IRS may hold executives, board members, accountants, and other parties with payroll tax involvement personally liable for paying the TFRP.
Can I shut down my business and restart?
If you go this route, you risk alter ego liability (the business’s tax liability attaches to the business’s alter ego, which can include its owner) or successor liability (the new business is essentially the old business under a new name). Furthermore, the TFRP will still follow whichever individual is determined to be the responsible party.
Sources:
https://www.irs.gov/irm/part5/irm_05-007-001
https://www.irs.gov/pub/irs-access/f656b_accessible.pdf
https://www.irs.gov/pub/foia/ig/spder/sbse-05-0525-0026-public.pdf
https://www.irs.gov/payments/offer-in-compromise
https://www.irs.gov/individuals/international-taxpayers/trust-fund-recovery-penalty