Generally, if a taxpayer owes payroll taxes for an amount less than $25,000, the taxpayer can request an installment agreement to full pay their tax liability within 24 months, provided that the taxpayer is in filing compliance. If the taxpayer cannot afford to full pay the tax liability within 24 months, and/or is not in filing compliance, and/or the amount of the payroll tax liability is more than $25,000, the taxpayer must request from the IRS Service Center that the case be transferred to the field and assigned to a Revenue Officer. However, if the taxpayer is not in filing compliance, the IRS representative will not place the account in the que for a Revenue Officer and the account could be subject to enforced collection action.
If the taxpayer is in filing compliance, the IRS representative will place the account in the que for a Revenue Officer to be assigned. The good news is that while the case is in the que, the IRS will not take any enforced collection action; such as a levy against the taxpayer’s bank account, or against any of their income sources. The bad news is that the taxpayer has to wait for the Revenue Officer to be assigned before they can resolve their tax matters.
Once a Revenue Officer is assigned to the case, he or she will ask the taxpayer whether or not they can full pay the tax liability within 60-days or make a lump sum portion to pay the balance due below $25k. If the taxpayer cannot full pay or make a lump sum payment, the Revenue Officer will file a Federal tax lien. A tax lien negatively impacts the taxpayer’s credit which in turn can have an effect on the production of income.
The Revenue Officer will also request a completed Form 433B Collection Information Statement for Businesses along with supporting documentation. The Form 433B is used for all business entity types, except for sole proprietorships. Sole proprietorships must complete Form 433A Collection Information Statement for Wage Earners and Self-Employed Individuals. The Form 433A will include a taxpayer’s personal and business financial information.
The Collection Information Statements provide the IRS with a taxpayer’s financial information; assets, equity, income and expenses. The IRS will review this information to determine a taxpayer’s ability to pay the back taxes, but will also use the information as levy sources; business bank accounts and accounts receivables. The Form 433B requires that the taxpayer provide the contact information for the business entity’s partner, officers, LLC members, major shareholders, etc. to see if any of these individuals may be held personally liable for the unpaid payroll taxes. The Form 433B also requires the taxpayer to provide information on their accounts receivables, information on their business assets which include, but is not limited to, the fair market value of the asset(s) and any encumbrances against the asset(s), and a profit and loss statement to show the income and expenses (cash flow) of the business entity.
If the business is no longer operating, the IRS Revenue Officer must place the account in currently, non-collectible status. However, before the Revenue Officer will place an account in currently non-collectible status, he or she will ask the taxpayer questions pertaining to the business assets. If there are business assets or open business bank accounts, the IRS will request that the assets be sold and the proceeds received from the sale be applied to the outstanding tax debt. In addition, the IRS will issue a bank levy to attach to any funds in a business bank account.
Meanwhile, the Revenue Officer will initiate an investigation on whether to assess the trust fund portion of the tax liability against one or more individuals. The trust fund portion of the payroll tax is the amount of the total federal income tax withholdings of their employees, one-half of social security and one-half of Medicare that was withheld from their employees’ paychecks. The employer holds these amounts “in trust” for their employees, so the IRS refers to the personal assessment of the employee’s federal income tax withholdings, one-half of social security and one-half of Medicare as the trust fund recovery penalty.
In order for the IRS to hold a person liable for payroll taxes, the IRS has to show that one or more individuals were “willful” and “responsible” for the failure to pay the payroll taxes. Once the Revenue Officer completes the trust fund investigation, and determines that one or more persons are personally liable for the unpaid payroll taxes, the IRS will place the business account in an installment agreement or place the account in currently non-collectible (generally if the business is closed), and can pursue collections against the individual(s) to collect on some or all of the unpaid payroll tax.
A taxpayer with an unpaid payroll tax liability can essentially have two installment agreements with the IRS to pay down the same tax liability because the IRS has two sources (business and personal) to collect from. The problem, however, is that the IRS charges interest twice, (1) interest on the unpaid payroll taxes, and (2) interest on the amount that was personally assessed against the individual(s). If multiple individuals are assessed, the IRS will only collect the amount once, but from which ever taxpayer can pay first. Thus, if taxpayers have the opportunity to make voluntary payments on an unpaid employment tax liability, it is to the taxpayer’s benefit to apply the voluntary payments to the “trust fund” balance.