3 Ways to Settle IRS Payroll Tax Debt

January, 03 2022 by Karen Reed, EA

Being an employer—or the person responsible for an organization’s payroll—comes with great responsibility. Employers are required to withhold payroll taxes from their employees’ wages and deposit them with the IRS within a specified timeframe. These payroll tax withholdings include federal income taxes and the employees’ share of social security and Medicare taxes. All of these together are known as “trust fund taxes” because the employer holds their employees’ money in trust until they make a federal tax deposit for the amount withheld.

A business’s required federal tax deposits include the payroll tax withholdings from the employees plus the employer’s matching share of social security and Medicare taxes. The deposit due dates will generally depend on whether the deposit schedule is monthly or semiweekly, which is determined by the total taxes in the employer’s lookback period. IRS Publication 15, Employer’s Tax Guide, provides information on how to determine your deposit schedule.

It is important to note that the IRS is serious about enforcing payroll tax liability and will assess a “failure to deposit penalty” of up to 15% for payroll tax deposits that are late or less than the required amounts. (If your failure to make a proper and timely deposit is due to a reasonable cause rather than willful neglect, you may be able to get the penalties waived by providing a convincing statement that explains the situation.)

Another penalty that may be assessed is the Trust Fund Recovery Penalty (TFRP), which is generally one hundred percent of the amount of the unpaid balance of the trust fund tax. The TFRP can be assessed against any person who is responsible for collecting or paying the employment taxes and willfully fails to collect or pay them. A responsible person is generally an owner of the business or a key employee with access to the bank accounts who know about the payroll tax liabilities and makes decisions about making payments. An example of willfulness is using the withheld funds to pay other creditors, which the IRS considers an act of intentionally disregarding or demonstrating indifference to the payroll tax deposit requirements.

If the IRS determines that you are a responsible person and you receive a Proposed Assessment of Trust Fund Recovery Penalty, you will be able to avoid the penalty by paying the trust fund taxes. As a responsible person, you are considered to be personally liable for the trust fund taxes, and the IRS will expect you to pay the amount due out of your own personal funds if it cannot be collected from the business. If you disagree with the penalty, you will have ten days to provide the IRS with additional information. If you are unable to resolve the matter informally with the IRS, you will have 60 days (or 75 days if you are outside the US) from the date of the letter to appeal.

The best way to avoid a Trust Fund Recovery Penalty or having other actions taken against you is to make sure that you collect and deposit all payroll taxes when you are required to do so. But if you do find yourself with a tax debt due to unpaid payroll taxes, you may be able to qualify for an installment agreement or an offer in compromise. An audit reconsideration may also be an option to explore in certain situations. Let’s review these options briefly.
 

In-Business Trust Fund Express Installment Agreement

The IRS offers businesses a convenient way to pay back their payroll tax debt through an In-Business Trust Fund Express Installment Agreement (IBTF-Express IA). The IBTF-Express IA is available if your liability is $25,000 or less—but if you owe more than $25,000, you can pay the debt down to qualify. The IBTF-Express IA requires that you pay the debt in full within two years or before the collection statute expiration date, whichever comes first. A Direct Debit Installment Agreement (DDIA) is an additional requirement for an IBTF-Express IA if the amount you owe is more than $10,000. You must also be current with all of your tax filings and payments.
 

Offer in Compromise

An offer in compromise may be an option for resolving payroll tax debt, but it is only available in certain situations. If the IRS accepts an offer in compromise from a business, they will still require that the remaining unpaid trust fund tax debt be collected from the responsible parties. The IRS will not consider an offer unless the trust fund amount is paid or TFRPs have been assessed on all responsible parties, though they do allow an exception to this requirement if your payroll tax debt is the result of payroll service fraud or if your payroll service failed to make deposits on your behalf.
 

Audit Reconsideration

An audit reconsideration is another option for resolving payroll tax debt that is the result of an audit when you disagree with the tax assessment resulting from the audit. To have your request accepted, you will need to provide additional documentation to support your position that you did not share during the initial audit.

If you are struggling with payroll tax debt, you are not alone. Fortunately, there are many options for business owners facing the burden of unpaid employment taxes, and help is available. A tax professional from TaxAudit can work with you to determine the best approach for your unique situation. Meanwhile, the most important thing is to respond promptly to any collection notice you receive, which will help prevent additional penalties from being added to your tax debt and reduce the chances of more extreme actions being taken against you.