Causes of Payroll Tax Debt

Causes of Payroll Tax Debt

Employers and the financial aspects of running a business do play a role in not paying payroll taxes timely.

Cash flow issues are a consistent factor in many businesses for the owners or financial decision makers fail to account for cash flow that is necessary to effectively operate without incurring debt.

Many decide that it is best not to pay the payroll taxes for no one is demanding payment during the quarter that the taxes are accumulating. The owners, decision makers pay other debts to keep the business going.

Business debts that are paid first are vendors, rent/lease of business location, worker’s compensation insurance, other types of benefit insurance or plans for the employees, State tax agency payments are categorized as to pay first since it is known that the state tax agencies are more aggressive in collection.

Leaving the Internal Revenue Service for later after the tax return is filed. Big mistake.

At least file the tax return even when there is a balance. Filing the tax return Form 941 Employer’s Quarterly Federal Tax Return or any other tax return by the due date can eliminate any possible failure to file penalty. This penalty can be as high as twenty-five percent of the tax not paid timely.

Relying on a tax professional such as an Accountant, employee, Payroll Service Provider, and others to file and pay the payroll taxes. Not a good idea for those that are officers, owners, members who have the responsibility and legal obligation to pay the debts of a company.

The personal liability of the unpaid payroll taxes will affect you personally, when the Internal Revenue Service sends out a Collection Officer to collect the debt.

Biggest and best course of action when others prepare, file, and pay payroll taxes on behalf of the owners, officers, others is to request an account transcript.

Request a copy of the Account Transcript for each quarter monthly via Form 4506-T. Or, verify via the business bank account that the money was withdrawn and processed to the U.S. Treasury (IRS).

Ask for a copy of the electronic payment from payroll service provider or secure copies of company checks used to pay the payroll taxes. Copies of cancelled checks must be front and back copies.

Businesses must be kept informed regarding payroll filing periods, deposit requirements, payment due dates, and paying on a timely basis. Otherwise, they will confront large penalties and interest.

Read Internal Revenue Code 6672 and Internal Revenue Manual Part 5.7 Trust Fund Compliance. These sections will provide you with more detailed information on how, why, who, when, what, where this process of personal liability was determined to be legal and enforceable.

The Revenue Officer is required to conduct interviews with the people, organization or entity that had the responsibility to file and pay the payroll taxes for each quarter. In addition, those who willfully failed to pay the IRS and paid other company expenses instead.

A Summons is issued to all bank accounts utilized to pay payroll and business expenses. The IRS seeks the bank signature cards, bank statements for the quarterly periods that are unpaid and copies of at least 3 checks front and back to conduct their investigation and recommendation for assessing (billing) personally those who were responsible and who willfully failed to pay the payroll taxes for a company.

Only when an entity is a sole proprietorship will the IRS not be required to conduct the trust fund recovery penalty. Sole proprietors are responsible for all the unpaid payroll taxes. Their assets can be seized and sold easily and more quickly than having to conduct the Trust Fund Recovery Penalty process.

No trust fund recovery investigation for General Partnerships either for general partners are liable for all tax debts of a partnership. Limited Liability Partnerships may include interviews and assessment of trust fund recovery penalty accordingly.

Then, the IRS Collection Officer will issue a Letter 1153 and Form 2751 which basically informs them that they are being charged personally the trust fund recovery penalty for failure to pay payroll taxes. Those who receive this letter and form have sixty days from the date of the Letter 1153 to submit an appeal.

The appeal for the Trust Fund Recovery Penalty must be submitted in writing with all the documentation, information and evidence that proves the person, entity or other company is not, or was not responsible for the financial decisions of the company (debtor). In addition, that they were not willful in not paying the payroll taxes.

If you disagree with the IRS Collection Officer that you are responsible and willfully failed to pay the payroll debt of a company, an appeal must be submitted to the Internal Revenue Officer who issued the letter 1153 and Form 2751.

If you agree with the amounts and quarterly tax periods indicated on Form 2751. Then, you can sign, date the form 2751 and return it I for one would not agree to anything. Allow the process to take its course.

Why would you not agree? It takes sixty days from the initial issuance of the Letter 1153 and Form 2751 to be appealed or received as agreed.

If you agree, maybe you can pay the trust fund amount only as shown on Form 2751. If so, you do not have to agree. Just designate the payment or payments on the memo section of your check to: “APPLY TO TRUST FUND ONLY”.

In this manner, less liability will be billed or maybe the money full pays the amount on Form 2751 and no billing against you will take place.

However, the Corporation or LLC part may still be due. Attempt to secure/negotiate an installment agreement at this point if you have not done so when the Revenue Officer first contacted you. Or if no request has been made via telephone or correspondence.

Make sure you make the request for an installment agreement and indicate the amount. Otherwise, enforcement action will take place.

Pending installment agreement approval usually or should stop any collection action such as a levy to bank accounts to provide time for managerial approval or processing of an installment agreement.

More on when to seek and Installment Agreement and what process must take place prior to securing an installment agreement, appeal rights and more at the end under Resolution Options.

Payroll Service Provider fraud is common. Businesses must be careful with who they choose to be their payroll service provider. Many businesses have found themselves owing payroll taxes that were paid via the business bank account to the payroll service provider for processing payment on the payroll taxes. Yet, money is kept by others within the PSP.

An offer in compromise for fraud maybe an option. Even when the IRS informed taxpayers that it is their responsibility to verify that a company, is following filing and paying requirements

. Underfunding a business is another because that creates payroll tax debts.

Embezzlement of funds by employees, officers, owners, etc. Common in many industries. Police reports, evidence of embezzlement, civil suits, and other means of proving that a business was a victim of embezzlement are required for the IRS to determine if penalty abatement is warranted.

Misapplication of payments can cause payroll tax debts and audits. Electronic Federal Payment Tax System is not error proof. Especially, when payments are designated to a specific tax year or specific purpose. Such as when trust fund only payments are submitted.

Bankruptcy proceedings can cause confusion as to who is responsible for filing and paying payroll taxes. Especially, when officers, owners of a business assume that a bankruptcy trustee has court approval to administer business operations.

Always confirm and talk with the bankruptcy trustee to verify. In most of cases the business continues to be responsible for all tax filings and payment requirements.

Changing business operations from one type of entity to another with different names and employer identification numbers. Or, for subsidiaries that have employees.

Form 941 Employer’s Quarterly Federal Tax Returns are filed by the parent company or it is determined that the subsidiary is separate and has its’ own payroll and other financial duties and responsibilities separate from the parent company.

Related entities at times misapply payments, file tax returns bundling two or more related entities causing a mess in payroll tax payments and reporting requirements. Costly mistake when everything must be amended and corrected to conform with the actual payroll for each entity.

Closing of business entities and not filing or paying through the last payroll paid causes notices, letters, and assessments up to the date of closure. Under IRC 6020(b) the IRS issues letters requesting payroll tax returns through the out of business dates. If none are prepared and filed.

The IRS will process a tax return according to their figures taken from possibly the last payroll tax return filed or a state tax return the business filed for the last payroll period. Changes can be made by filing an original tax return to adjust the IRC 6020(b) tax return.

Stopping the Cause of the Payroll Tax Debt

What should you not do first when your company owes tax debts?

1. Continue doing what you have been doing when your first knew that your company was not current with paying.

2. Try to get more clients and money to pay the overdue payroll taxes first or start paying the overdue taxes?

3. File Bankruptcy?

4. Call the IRS on your own and ask for an installment agreement?

5. Get advice from a Notary, tax preparer, business consultant.?

6. Do nothing and let the bricks fall wherever or whatever.?

The requirements from the IRS is to get a business back into compliance and stop the pyramiding of tax debts are:

1. Pay the current payroll tax debt and continue to pay future federal tax deposits on a timely basis. Otherwise, any arrangement that is approved will default or be terminated.

2. File all tax returns that have not been filed immediately. No ifs or other excuses are valid. There are many CPAs and Tax Preparers that can prepare overdue tax returns.

3. Get your bookkeeping and accounting up to date. The IRS in most of the cases requires full disclosure of current financial status of a company and its owners, officers, members.

4. There may be a requirement to secure financial statements from owners, officers, members of a company depending on the amount of payroll tax debt, time it will take to full pay the tax liability and investigating who was responsible for not paying and keeping payroll taxes current.

5. Get business loans before any tax lien is filed. Once a lien is recorded it is very difficult to get it released unless your company fully pays the debt.

6. Tax Lien is not a levy. Tax liens as indicated above are documents that are filed with Secretary of State where a company is located and with the Country Recorder. This makes it virtually impossible to secure a loan.

7. A levy is a legal document that is issued to financial institutions, accounts receivable sources, third parties that may owe money or have money that belongs to the taxpayer. Release of levy is feasible if you call the tax agency and provide them what they want to release the levy.

NOTE: SBA loans will not be approved for paying tax debts. Therefore, do not even try. It is a useless and time-consuming process to apply and get approved for an SBA loan.

1. Try getting loans from family and friends. Make sure that loan documents are prepared and signed with terms for the repayment of the loans. In this manner, the loan payments are deducted as business expense.

2. Sell all assets that are not essential for the business or personal assets such as jewelry, boats, cars, RVs, and real property that is not a personal residence such as rental property, vacation property.

Very Important: If you secure personal loans or sell personal assets to pay down or full pay payroll debts. Make sure you designate the payment (s) on the memo of the check “TRUST FUND ONLY”. In this manner, you reduce the amount that can be billed (assessed) against you personally for unpaid payroll taxes.

Read Internal Revenue Code 6672 regarding potential personal liability for unpaid trust fund taxes. This includes payroll taxes and excise taxes.

10) Maybe you and others who are vested in the tax debtor entity will have to seek other types of employment to paydown the payroll debt.

11) Filing bankruptcy will only cost more money and you will lose control of your company. Payroll taxes are not dischargeable. Bankruptcy only exposes your company to scrutiny by the Bankruptcy Court and creditors. Not a final good option in my opinion. A bankruptcy discharge does not remove payroll Tax Debt.

Factoring the business accounts receivable maybe an option. Although, you need to verify the costs and if they will loan any funds with an IRS or State tax lien that has been filed.

*There is a tax collection process and procedure to lift the lien when there is a factoring agreement. Seek assistance from a tax resolution expert.

12) Close the business and sell all the assets to pay down or payoff the payroll taxes. Do not pay Corporate, LLC or other taxes that are not trust fund. Pay the trust fund taxes first. If your company is a Corporation or LLC, your company does not have to pay the non-trust fund portion of the payroll taxes. The reason is that the entity is out of business. No assets left to pay the taxes due.

Again, if you need assistance trying to figure out what to pay first when liquidating. Contact your tax resolution expert.

1. Can You sell your business with tax liens? This maybe your best option to pay down the tax debt. However, make sure that the escrow handling the bulk sale knows how to request lien discharges to pass title free and clear of any tax liens.

2. Does your company qualify for an Offer in Compromise?

It will depend on the financial status of your company.

Officers, members, and others who have the responsibility and conduct financial decisions for the company. For they may have to submit a personal financial statement to pay down the trust fund portion of each quarterly period owed. This type of offer case has more items to be considered for it to be a potential candidate for an offer in compromise.

**Sole proprietors and General Partners of a Partnership. Beware. You owe all the tax debt for payroll taxes. Bankruptcy not an option for the payroll tax is not discharged.

Sole proprietor prepares Form 433A Collection Information Statement for Individuals and Self Employed. Start with the Business portion of the form. You will need to prepare a Profit & Loss Statement for the prior six months.

Again, if you need assistance in preparing your financial statements, bookkeeping, and preparing financial statements required. Seek help.

The financial statement with back up documentation will be utilized to determine if your case qualifies for an Offer in Compromise, Installment Agreement, Collateral Agreement, or other option available according to your case issues.

Have all the Appeal rights been exhausted? If so, what other options are available to the taxpayer?

Which payroll tax resolution option is best for your situation? It all depends on the type of entity, type of tax, tax periods for collection and assessment statutes, balances due, financial condition of owners, officers, members etc. It can be as simple as a penalty abatement or file tax court.

For free resources go to resource page at. www.advocatetaxgroup.com

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