What to do when you owe the IRS back payroll taxes
A payroll tax problem is the most serious type of tax you can owe the IRS. The IRS monitors all employers to see when you are late with payroll deposits. I don’t mean to twist the knife, but if you have back payroll taxes, you will be assigned a Revenue Officer. He or she will come to your place of business and will be very aggressive about collecting from you and finding information. The Revenue Officer will subpoena a bunch of financial documents. The Revenue Officer may or may not show you respect and understanding. The Revenue Officer will one one hand, ask that you borrow money on one hand, and then on the other hand, file a Federal tax lien against you on the other hand so that you can’t borrow money. (Note: this is not their fault, this aggressive lien filing stance is the policy of the highest level of the IRS)
The process of owing the IRS back payroll taxes is an invasive, horrible, stressful feeling. If you are experiencing this, you are not alone. And through this all, you have to assure your employees that everything will be alright, assure your customers all will be well, when in fact, you may not be sure of any of these things.
To help stop that slow sinking feeling, this article will show you all the options available to you when you owe the IRS back payroll taxes.
1. Do nothing
One option is to do nothing. Hope it goes away.
Pros: No legal fees
Cons: No legal fees, yet. Eventually you will have to deal with this. Unpaid trust fund taxes will be assessed against you personally. If you file joint, they will also be assessed against your spouse. Unlike regular taxes, these “trust fund” taxes can not be discharged in bankruptcy. You will have a debt so large, that you will never be able to crawl out from under it on your own unless you are able to have someone negotiate an IRS tax debt resolution on your behalf. Additionally, there are other alternatives to lower your exposure. No one like bad things happening, but when bad things happen, you need to take action to “compartmentalize” the damage. To apply a nautical metaphor: A little flood in a forward compartment shouldn’t sink your entire whole ship, should it? Bad things happen to the most successful people. The difference is that successful people don’t abandon ship when the damage can be controlled, and they can sail on.
2. Continue as-is, hoping some money will come in.
Pros: No legal fees
Cons: That’s a lot of stress, hoping. Isn’t it? The problem could get worse. But let’s assume that the money does come in. Great. Now you can get all paid up, get the Revenue Officer out of your way. Problem solved, right? Well, maybe not. The chances of you having another payroll tax problem is huge. Much much more than a business that never got behind. One reason is that you were charge huge penalties for late payroll deposits another is that you likely have something wrong with your business. Are you charging enough? Are your payroll expenses too high? Is this a cyclical change? Or something permanent? I’d like to know does your business need a turn-around, and if so, what should be done to put you on stronger footing.
3. Deal with the IRS Revenue Officer yourself
Pros: No legal fees
Cons: The Revenue Officer will likely try to squeeze as much money out of you as possible, making it extremely likely that you wind up defaulting the repayment arrangement or come short on another payroll. Either case, you have a new payroll tax problem. Also, you will be spending a lot of time you should be focusing on making more money dealing with the Revenue officer yourself. Additionally, the Revenue Officer will begin asking around to find other “responsible people” to asses the trust fund penalty against you. This could be one of your key employees who had nothing to do with this, regardless, it’s pretty stressful not having legal representation between you and the IRS.
4. Rope your CPA or an attorney friend into helping you
Pros: Lower cost
Cons: You may forever destroy a relationship with your CPA or attorney. They have other things to do. Most CPAs would rather work on compliance than be struggling trying to help you find the best deal. Most CPAs are not confrontational by nature, and sometimes your representative needs to be, especially when a Revenue Officer is acting out of line (yes it happens). Typically, for the best deal, an appeal will have to be taken. But for the best results with IRS appeals, it is necessary to hire someone who has the knowledge, experience and attitude to represent you in front of IRS, and even take your case to tax court if necessary.
5. Hire “X tax resolution” firm
Pros: Lower fees
Cons: Look, I’ll be honest, not all tax resolution firms are bad. Some can really provide a cost-effective solution to a tax problem. But this is for simpler, lower stakes tax problems. A payroll tax problem is the most difficult serious case. A tax resolution firm who is used to settling $30,000 of back taxes someone owed from 2006 can not handle finding the best resolution to on on-going tax problem that can completely destroy your life and the people around you. They simply don’t have the resources or legal background. If your business is worth enough for you to spend your time on it, it is worth enough for you to get the absolutely best legal help available.
6. Hire a dedicated law firm that specializes in successful resolution in payroll tax problems
Pros: The best tax resolution law firms know how to deliver the value you need, and can limit the damage of a tax problem and also, investigate what is going on so that this will never happen again. There are myriad tools available to find optimal solution that will permanently end a payroll tax problem: An installment agreement, currently non-collectible, an Offer in Compromise for payroll taxes, shutting down the business, selling assets to apply towards to the Trust Fund liability, and combination of these can help find a real end to a nagging tax problem.
Cons: Good tax attorneys are expensive. There’s no way around that. But the best ones are experts at delivering value.