Behind on Your Business Payroll Taxes? Know Your Payment Options and Avoid Payroll Penalties
Updated: Jul 9
Businesses fall behind on their tax obligations for a variety of reasons. Sometimes it's a bottleneck in customer payments, sometimes a recession. Businesses may find it easiest to avoid depositing IRS payroll taxes in the hope that they can catch up when vendors pay bills or revenues grow again. For many, employment tax debts may grow out of control and end up on the radar of the IRS for collection action. IRS payroll tax penalties will be assessed and can be substantial.
Installment Agreement for Payroll Taxes
For businesses that believe they will have sufficient cash to pay back taxes, an installment agreement for payroll taxes may resolve the problem. Various options exist within this category, and taxpayers must evaluate the types of taxes at issue, including payroll taxes. An installment agreement for payroll taxes allows a taxpayer to manage the repayment process and continue to business without severe cashflow disruptions.
Is a Payroll Tax Installment Agreement Possible?
The first step for business taxpayers is to determine whether there is a realistic chance of paying current operating expenses and taxes, as well as the delinquent taxes. Business owners must assess cash flow and have a plan that addresses these concerns. The IRS must believe that the taxpayer will be able to pay both current taxes due, including income, payroll and other taxes, as well as past tax balances owed to avoid taking collection actions. These actions would include filing lien notices, levies and seizures, and assessing trust fund recovery penalties. Taxpayers in this situation can expect the IRS to review financial statements for the reasonableness of ongoing expenses.
What are the Benefits of a Payroll Tax Installment Agreement?
The benefit of an installment agreement is the IRS' willingness to defer the collection actions described above (i.e., liens, levies, etc.) while the taxpayer is in compliance with the agreement. There may be a rare case where collection is in jeopardy that might force the IRS to utilize collection efforts to protect its interests, but generally if payments are made the IRS will allow the business taxpayer to continue making payments to satisfy the debt. Taxpayers may also face additional scrutiny if prior installment agreements were not completed or payments were missed. In these cases, the IRS will take additional steps to ensure that the taxpayer is taking positive actions to pay down delinquent balances and file returns before granting an installment agreement that the taxpayer may qualify for.
For businesses that continue operations, the amount and type of the debt will drive the repayment solution. Payroll trust fund installment agreements offer options including an express payment option that may benefit taxpayers. The IRS' initial review check is whether it believes a business can fully pay the debt at once with a single payment. If this is the case, an installment agreement will be denied. For taxpayers that cannot fully pay at once, but can repay the tax, penalties and interest over time, an installment agreement will be the IRS' selection. The IRS provides for a regular and express installment agreement depending on the finances of the taxpayer.
For trust fund tax debts, taxpayers may be eligible for an express installment agreement. These agreements are available for certain unpaid balances of $25,000 or less. The rules for these taxes appear to be a little more complex and various payment strategies to qualify may not be available. Further, the express agreement must be repaid within 24 months and must be paid prior to the collections expiration date, which may be sooner than the 24 month period. While taxpayers must be careful attention to the details of these plans to qualify, the benefits generally are a simpler application process. For example, no IRS agent field call is required, no financial statements must be provided, and a lien notice filing determination is not required. Taxpayers must generally be in compliance with filings and payments, however, to receive IRS approval. Further, depending on the timing and status of the account, the IRS may be required to make a lien notice determination after the application. This determination is not the same as a requirement to file a notice of federal tax lien (NFTL), and there is wide latitude to approve or deny a lien notice. A major factor is prior default.
For business trust fund taxes that do not qualify for an express agreement, as described above, a different process is required. Generally for taxpayers with a payroll or trust fund tax debt of greater than $25,000, this process must be followed. The IRS will first perform a full pay analysis to see if a taxpayer can repay the debt without delay. The taxpayer must provide the IRS with a collection statement Form 433-B and financial information to make this determination. As mentioned previously, the IRS makes a determination of whether the business is likely to succeed going forward and able to satisfy both future and back payroll taxes by evaluating the information provided by the taxpayer. The IRS will go further into the taxpayer records verifying asset ownership and possibly encouraging the taxpayer to sell assets or borrow to pay down the debt. The IRS then further determines whether to file a notice of federal tax lien against the taxpayer's property. Lastly, the IRS will review the business owners tax compliance record and consider the assessment of a trust fund recovery penalty on top of other penalties. This is a major difference from the express agreement and strong incentive to get back into compliance early if possible.
Taxpayers who comply with the installment agreement terms and propose repayment terms that do not risk non-payment based on the expiration of the assessment statute of limitations generally are not subject to the trust fund recovery penalty. For taxpayers that cannot meet these terms, the IRS will put together information necessary to assess the trust fund recovery penalty against the responsible persons. While this does not ultimately lead to the penalty being assessed, this process does provide a strong incentive to avoid designing an installment agreement that triggers this process. For example, the IRS would begin interviewing persons typically responsible for withholding and paying the payroll taxes to the IRS to determine possible liability. This is not a pleasant process and the magnitude of the penalty is typically a shock to the finance employees running the business.