Resolving a Payroll Tax Debt

Brian C. Hill
November 15, 2011 — 1,860 views  
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In light of the current economic slowdown and the tightening of credit, it is more common than ever for employers find themselves burdened with is unpaid payroll taxes. Business owners generally match the employment taxes withheld from their employees' pay checks and remit those to the IRS along with the standard federal and state tax withholdings. When times are tough, it is not uncommon for an employer to delay in paying its payroll withholdings in the hope of being able to send them later when circumstances have improved. A business owner may be waiting for a contractor or client to pay an invoice or for the bank to approve a short term loan. If one of these improvements doesn't materialize, the business can unintentionally be left unable to pay the back taxes and can suddenly face a very sizable and unexpected tax debt.

No matter what the cause, delinquent payroll returns and unpaid payroll taxes can cause a host of problems. Some portion of a company's payroll taxes are amounts withheld from employees' wages to pay their share of federal withholding taxes, Social Security and FICA. In other words, a portion of the total amount owed is actually the employee's money that the employer is holding in trust to remit to the IRS or State Tax Agency on the employee's behalf. If a company fails to file a payroll return or pay its payroll taxes, the employee's IRS and State accounts will not be credited at tax filing time.

Because payroll taxes include amounts withheld from an employee's wages and held in trust by the employer, the IRS pursues collection of a payroll tax debt much more aggressively than it does other tax delinquencies. To encourage compliance with the timely payment of withheld income, employment and social security taxes, the IRS has created a unique and potentially devastating penalty called the Trust Fund Recovery Penalty. This penalty can be assessed against any person responsible for remitting payroll tax payments and can be assessed whether or not the business continues to operate. Since the IRS defines a responsible person as any person or group of people who have the power to direct, collect, account for or pay trust fund taxes, that person may fit any one of the following descriptions:

  • A corporate director or shareholder
  • An employee or officer of the business or corporation
  • A partnership member or employee
  • A board member of a non-profit organization
  • Any other person with control or authority over the payment of the taxes

In addition to the steep Trust Fund Recovery Penalties, the collection process for payroll tax debt is accelerated and settlement agreements are much more difficult to obtain.

Due to the combined effect of the factors discussed in the previous paragraph, a tax debt can potentially result in the downfall of an otherwise successful business. In light of this risk, our firm always advises financially troubled business owners to make every effort to comply with all tax filing deadlines and to pay the related taxes in a timely fashion. If a payroll tax debt already exists, we encourage prompt action as the best way to get control of the situation and obtain tax relief. Tax debts arising from unpaid payroll taxes can be very significant since they include the assessment of a substantial Trust Fund Recovery Penalty in addition to the standard failure to file penalties, late payment penalties and interest assessed on the unpaid balance. Obviously the larger the tax debt, the more difficult it can be for a smaller company to recover and find options for tax settlements.


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Brian C. Hill

If you are a business with a tax debt, we can help you evaluate the available tax settlement options and resolve your tax debt problem. Because we know the collection laws and have experience negotiating with the IRS, we are in a better position than an individual taxpayer to stop enforced collection activity and to arrive at a reasonable tax settlement with the IRS. For more information about our tax debt resolution services, visit us today.