Falling Behind On Payroll Taxes
As of June 2012, employers owed the United States government approximately $14.1 billion in delinquent employment taxes. The IRS is planning a massive offensive on this form of non-compliance.
Failure to comply with employment tax obligations is an extremely serious offense. The majority of the delinquent employers fall behind due to cash flow problems. As the business encounters economic downturn, or a cash flow issue, withheld taxes might be used to cover other business or even the owners’ personal expenses. If the non-compliance is not addressed quickly, the delinquency will compound and may last for years, eventually destroying the business. Employers often fall behind on filing the required Forms 940 and 941 altogether.
How Did The Business Get Into Payroll Tax Trouble?
The majority of businesses fall behind on employment taxes due to a cash flow crunch:
- Business slows down due to the economy
- Owners use the withholdings to run the business
- Owners use the withheld funds for personal purposes
- Owner or Manager is unavoidably absent
- Major customers don’t pay on time
- Business grows too fast requiring more workers
- Business is a victim of embezzlement
- Owner doesn’t know or understand payroll taxes
The business owner or responsible manager try to convince themselves that the tax debt will be paid back once the business gets back on track.
Eventually the IRS will start sending letters requesting payments, or asking for late tax returns to be filed. The magnitude of the problem becomes more clear and urgent when an IRS agent shows up to investigate the delinquency. IRS aggressively pursues collection of delinquent payroll taxes from businesses. The government can also go after the company’s officers, owners and other responsible individuals to collect the “Trust Fund” portion of the payroll tax debt.
How Do We Fix The Payroll Tax Problem?
Although taxpayers, including businesses have certain procedural right in dealing with the IRS, the government will not cooperate with the business if the taxpayer does not comply “stay current” with the tax law by:
- Filing any delinquent tax forms
- Making immediate tax deposits for the current quarter
- Depositing and filings future taxes on time
Once the current and ongoing compliance is established, the taxpayer can move forward with the resolution such as:
We Need More Time To Turn It Around!
If the business is able to get back in compliance with ongoing employment tax obligations, the IRS may grant the taxpayer an installment agreement to repay the payroll tax debt.
Ideally the IRS wants the tax debt paid in 12-24 months. However, longer repayment periods may be allowed. The IRS will review your financial information to determine how quickly the debt will get paid off, while keeping up with ongoing tax obligations.
A sole proprietor will have to use all available income, (including income generated outside of the business). In some states, the spouse’s income can be used to pay the business taxes. This is a case of a middle school teacher getting her wages levied to pay the tax debt of the husband’s construction business. Personal assets may also be used to pay off the debt of your sole proprietorship. The IRS may also request that you borrow some or all of the funds, or show proof that you attempted to borrow, but were rejected.
For a payroll tax debt incurred by a corporation, the IRS may collect a portion of the tax debt from a person responsible for complying with the company’s payroll tax obligations. The IRS can collect the “trust fund” portion from such responsible persons. The trust fund portion includes all withheld income taxes plus employer’s half of the Medicare and Social Security Taxes (FICA). This is known as the Trust Fund Recovery Penalty.
Restructuring The Business To Fix Payroll Tax Problem
A well-planned restructuring plan must focus on:
- Cause of the delinquency
- Immediate recovery plan
- Long term compliance plan
Causes Of The Payroll Tax Delinquency
Here are the most common causes of employment tax delinquencies:
- Economic recession
- Misuse of withheld funds (with intent or without)
- Illness or personal problems of the owner
- Payment delay or bankruptcy of a big customer
- Business grows too fast-cash flow can’t keep up
- Failure to understand tax laws
Required Immediate Actions
The initial and absolute first step is to get current with immediate tax obligations. The company must:
- Deposit and match the tax withholdings for the current quarter
- File and pay current taxes as they come due
- Hire a payroll company (like ADP or Wells Fargo)
- Determine the feasibility of becoming profitable or break even
- Determine if the business can afford all current employees
- Consider using independent contractors instead of employees
- Determine if the Trust Fund Portion can be paid off
Long Term Strategy For Business Tax Recovery
Compliance with all future tax obligations (including income tax) is an absolute requirement. The IRS Revenue Officer may request copies of tax deposits and filings as they are paid and filed.
If the business has been restructured for profitability and tax compliance, the remaining balance will need to be addressed. The business will be required to secure a loan to pay the tax debt. If a loan cannot be secured, the following options may be available.
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