There aren’t many IRS problems that feel as insurmountable as payroll tax debt. When you’re behind on employment taxes, you should expect IRS notices to escalate quickly, resulting in threats of liens or levies. It’s not just risky for your business. The IRS can hold responsible parties personally liable for some unpaid employment taxes, even if you are struggling to keep your business afloat.
That’s why many business owners wonder if an offer in compromise could offer relief. In some cases, an offer in compromise can be used for unpaid payroll taxes. However, it’s important to note that payroll taxes are viewed differently by the IRS than income tax, and that may affect your ability to have your offer accepted.
You can discuss this option and other solutions with a tax professional at 20/20 Tax Resolution. To get the peace of mind you need, call us at 1-800-363-5054 to schedule a consultation.
Key Takeaways
- Payroll taxes are some of the most aggressively enforced IRS debts because they involve trust fund taxes.
- Only some parts of your payroll tax debt may qualify for an offer in compromise.
- If a business does not pay payroll tax debt, the IRS may hold business owners and other responsible parties personally liable.
- An offer in compromise requires strict compliance, full financial disclosure, and proof that the IRS cannot collect what is owed.
- Other payroll tax relief options may protect your business and assets.
Why Payroll Tax Debt is Treated Differently by the IRS
Payroll taxes aren’t handled the same way as other business tax debts. When a business owner runs payroll, the money they withhold from employee paychecks is considered trust fund taxes. These include federal income tax withholding and the employee’s share of Social Security and Medicare contributions.
These withheld amounts do not belong to the business. The business is only meant to hold those funds in trust until their next scheduled IRS payroll tax deposit date. Those funds belong first to the employee and then to the IRS. Failing to remit those withheld funds is essentially viewed as a misuse of government funds.
As a result, unpaid payroll taxes come under intense IRS scrutiny. You may face faster enforcement timelines and heightened risk of personal liability. Even if the business closes, it remains responsible for unpaid payroll taxes.
Once you get behind, it can get hard to catch up, especially as interest and penalties grow on the balance. Handling payroll tax mistakes immediately is crucial if you want to avoid getting into a cycle of late returns and late payments.
Understanding the Offer in Compromise
The offer in compromise program lets qualifying taxpayers settle their tax debt for less than they owe. The settlement amount isn’t based on what you want to pay or what you think would be fair to pay; it’s based on in-depth calculations that take into account your business’s debts, assets, cash flow, and other obligations.
The IRS only approves an OIC if it believes that:
- It is unlikely to collect the full debt
- The offer represents the maximum amount the IRS could reasonably expect to collect.
- The taxpayer cannot pay off the debt with their current income and assets.
People often assume that an offer is more likely to be accepted because it’s hard for them to pay, but that isn’t a factor to the IRS. The IRS is focused on what it can collect, even if payment strains a taxpayer’s finances. However, for extreme cases, the IRS may approve offers based on “effective tax administration”.
There are multiple ways to qualify for an offer in compromise, but for payroll taxes, doubt as to collectibility is the most common route. When you choose this option, you’re telling the IRS that they won’t be able to collect the full amount owed because you are unable to pay it.
Can Payroll Taxes Be Settled Through an Offer in Compromise?
In limited circumstances, the IRS may accept an offer in compromise for payroll tax debt. Typically, however, the agency will only settle the non-trust fund portion of these taxes.
What does that mean? Payroll tax liabilities are separated into trust fund portions and non-trust fund portions. The trust fund portion includes employee withholdings, and the non-trust fund portion includes the employer’s share of payroll tax, penalties, and interest.
The IRS rarely accepts an offer in compromise for trust fund taxes. However, if you want to settle the trust fund part of your debt, there are a few things to keep in mind
- If the IRS accepts an offer from an employer for the trust fund portion of the payroll tax debt, the agency will attempt to collect the rest of the debt from responsible parties.
- If the IRS cannot collect the rest of the trust fund portion, it will attempt to make Trust Fund Recovery Penalty (TFRP) determinations on all potentially responsible parties.
- The TFRP determination is not required if you are submitting an offer as a victim of payroll service provider failure or fraud.
To qualify for an offer, your business must also be up-to-date on current tax filings and federal tax deposits for the current quarter, as well as the past two quarters.
The Impact of a Trust Fund Recovery Penalty
One of the most dangerous aspects of payroll tax debt is the Sanción de recuperación del fondo fiduciario. When a business fails to pay trust fund tax debt, the IRS may identify responsible parties who were responsible for collecting or paying payroll taxes and failed to do so. That may include owners, partners, shareholders, or even employees or third parties who handle payroll for the company.
As explained above, if a business settles some of the trust fund portion of a payroll tax debt, the IRS will attempt to identify responsible parties and assess a TFRP against them in the amount of the unpaid trust fund tax.
If the IRS assesses the Trust Fund Recovery Penalty against an individual, they may be able to settle that debt with an offer in compromise. However, it’s difficult to get approved, and if one individual settles part of a TFRP, the IRS will pursue any other responsible parties for the remaining amount of the penalty.
When the IRS Rejects Payroll Tax OIC Requests
Payroll tax offers in compromise are frequently denied. Offers in compromise already have a relatively low acceptance rate, but acceptance is even more challenging if part or all of your tax debt comes from trust fund taxes.
Common reasons for denial include:
- Ongoing noncompliance, such as missed deposits
- Unfiled payroll tax returns
- Insufficient financial disclosure
- Too much equity in business assets
- Ample business revenue to pay the debt
- Ability to pay via an In-Business Trust Fund Express Installment Agreement
Staying current on all required filings and deposits is critical. The IRS is unlikely to approve an offer if you are still accruing new payroll tax debt that will eventually land you back in the same position that you’re currently in. Filing required returns and making all required deposits on time shows the IRS that you plan on complying in the future.
This is particularly important to remember because of how long it can take the IRS to review an offer in compromise application. Many applicants wait upwards of a year or more for a decision from the IRS, and even one missed deposit during that time frame can result in your application being denied.
Alternatives If You Don’t Qualify for an OIC
If settling payroll tax debt through an offer in compromise isn’t a realistic option for you, other tax relief options may be available to you.
Acuerdos a plazos
A payment plan allows you to avoid enforced collection, pay the debt over time, and keep the business operational. Note that, depending on the amount of debt accrued, the IRS may still place a lien on business assets to protect its interests.
Currently Not Collectible Status
If your business finances cannot support any payment toward your debt, currently not collectible status may give you some time to get back on a better financial footing. The IRS temporarily stops collection activity, but interest and penalties continue to accrue.
What About Bankruptcy?
Most trust fund payroll taxes cannot be discharged in bankruptcy. Filing bankruptcy without understanding this can leave you in a more unstable financial position with damaged business credit—and you’ll still be responsible for the trust fund tax bill.
How to Strengthen a Payroll Tax OIC Application
If you decide to move forward with an offer in compromise application, there are several things you can do to submit the strongest application possible:
- Make sure your financial disclosure is thorough: Your financial disclosure must include every detail of your finances. The IRS goes through these applications very closely, and any inconsistencies or omissions they find will raise red flags.
- Ensure ongoing compliance: The IRS wants to see that you can be compliant with filing and payment requirements moving forward. Demonstrate that by filing and paying on time for all new payroll tax deposits.
- Work with an experienced tax professional: A tax professional can look for undisclosed financial information that weakens your application, explain your odds of success, and help you explore other options if an offer in compromise isn’t realistic.
Steps to Take Before Submitting Your Application
Before requesting an offer in compromise, file all payroll tax returns and ensure that you are current on all recent deposits. Separate business and personal liabilities.
This is also a good time to evaluate whether or not the business should continue operating or dissolve. If you cannot keep up with payroll tax requirements moving forward, that may factor into your decision.
Get a free consultation
Estamos comprometidos a encontrar solucionesLearn MoreWorking With a Tax Resolution Professional
When you choose 20/20 Tax Resolution, you get guidance and support from tax professionals who know how the IRS handles payroll tax debt and how tough it can be to get an offer in compromise approved. With our in-depth review of your tax situation and finances, we can help you understand whether or not an offer in compromise is the best step for you right now – and if it’s not, we’re here to help you evaluate other tax relief options.
Let’s talk more about your options during a free consultation. Schedule your no-obligation consultation online or call us at 1-800-363-5054 now.
Preguntas frecuentes
Can my business settle payroll taxes if it’s still operating?
Sometimes, but approval is rare. Your offer may be accepted if the IRS believes that it cannot collect payment in full and that your business can remain compliant moving forward.
Can the IRS come after me personally for payroll tax debt?
Yes. The IRS can use the Trust Fund Recovery Penalty to hold you and other responsible parties personally liable for the trust fund tax debt, regardless of whether or not the business is still running.
Is an offer in compromise worth considering for my payroll tax debt?
Maybe, but only if your financial records back it up. Offers in compromise have a low acceptance rate in general, so it’s important to discuss this option with a tax professional before putting time and effort into requesting relief.
What other tax relief options are available for payroll tax debt?
You may also want to look into an installment agreement or currently not collectible status, depending on your financial status and the amount of debt you have.
Resources:
https://www.irs.gov/payments/offer-in-compromise
https://www.irs.gov/taxtopics/tc204
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