Whether you own a dry cleaning business, restaurant, landscaping, whatever as a small business owner, you have a lot of responsibility to simply remain in compliance… sales tax, income tax, payroll tax, bookkeeping.  And this isn’t even what your business is about. 

Being in the tax resolution business I have seen it many times in the past.  As cash flow dips, the payroll taxes that were withheld from employees paychecks gets used to fund the daily operating expenses for the business.  The owner of the business quietly crosses his fingers hoping that next month will get better…and then the next month…and then the next month.

Meanwhile, failure to deposit, failure to pay, failure to file; all the penalties begin to add up.  Then one day an IRS Revenue Officer shows up at the front door and wants to talk about payroll tax delinquencies.  And now the amount owed is just too big for the business and business owner.

Payroll Tax is the number 1 reason why small businesses end up in tax collection status.

Before the IRS will discuss any type of resolution the business must first get into compliance.  All bookkeeping needs to be completed and up to date.  All quarterly filings, payroll tax returns needs to be filed.  Additionally all income tax returns for the business and possibly the owner and all responsible parties must be filed.

If the business cannot pay the debts a Trust Fund Recovery Penalty will be assessed on the owner(s) and all other responsible parties such as the company bookkeeper and anyone that has signature authority on the company bank account.

This can quickly become a very difficult fight on many fronts!

So How do these Cases get Resolved?

Do You Have a Viable Business?

First of all, do you really have a viable business?  A business that cannot pay is payroll and sales taxes is not a viable business.   “But it’s really a good business!” says the owner.  If you paid yourself $90,000 last year but owe the government $110,000, do you really have a good business?  It’s not a good business if it can’t pay its bills and its’ bleeding cash.  Ultimately, the IRS point of view is that if you can stay current then you need to shut the business down and get a job.

It is also important to remember, that a bad business can ruin other assets.  A bad stock that you own can only go to $0.  A bad business can absorb other assets beyond just the business.  We’ve people lose their homes, liquidate their retirement accounts, mortgage other assets in an effort to save a dying business.  Determine that you have a viable business.

Okay so you have a viable business… now what?

If the business is a C-corp. and the owner(s) take a reasonable salary then the debt is set up on an installment agreement and paid in full.  Simple.

What about a sole proprietorship?  The IRS will first request a 433(B).  A 433 (A) will also need to be included because the business owner will still need to pay his standard living allowances.  For example, the 433(B) says the business can pay $100,000.  Now the owned needs $72,000 to bay his bills.  So the company starts paying $28,000 on the past due payroll tax. 

So what do you do if the business is a partnership?  Are all the partners equally responsible?  In the beginning all the partners are friendly and just want the case to get resolved.  Then they go home and tell their spouses how much it’s going to cost.  “Why do we have to pay?  You were out selling and bringing money into the business.  Your partner was in the office.  He was supposed to be balance the books.  He should’ve known.  Not you!”  says one of the spouses.

Now everyone is pointing the finger at one another and things are about to get ugly, uglier than they already are.  As a tax resolution professional you also have potential for a conflict of interest problem.  It is our company policy to only the business or one of the partners.  Never both.

Keep in mind that if a business can afford to pay the IRS will expect to establish an installment agreement.  If the business can’t afford to pay, the bushiness is headed for permanent closure.   A business can seldom settle debt through an offer in compromise and still remain in business.

So the Business can’t pay and shutdown is inevitable…

By now the IRS will have placed a lien on the business assets.  Even if the lien has not been formally filed, it is in place by way of statute.  All assets that have liquidation value will in fact be liquidated and the money received will be applied to the outstanding payroll tax debt.

A Trust Fund Recovery Penalty will be assessed on the owner(s) and all responsible parties.  At this point the IRS will handle the case on an individual level and the IRS will attempt to collect the debt from all parties until the entire amount of the TFRP has been recovered.

To sum it up, payroll taxes are serious business at the IRS.  These funds are held in trust by the business owners and payroll tax is used to fund the daily operating expenses of the US government.   These cases can quickly become ugly and very complicated.