How to Neutralize and Eliminate Payroll or Trust Fund Tax Problems

How to Get Payroll Tax Forgiven

Make no mistake, this is one tax problem you should not ignore…

It’s a Common Theme. The business is struggling and cash flow is tight. A decision is made not to pay the withholding from employee paychecks. As soon as the big deal comes along, the thinking goes, the withholding will be re-paid. But the big deal never comes, and the withholding is not re-paid. Soon, things turn very ugly when a tenacious IRS revenue officer shows up. And even well-intentioned folks find themselves in a world of hurt as the IRS wastes no time enforcing collection.Example of IRS Forgiving Trust Fund Penalty

Trust Fund Recovery Penalty

Trust fund taxes are those taxes required to be withheld from the employee’s salary or wages for personal income tax and social security tax obligations. The IRS will assess a trust fund recovery penalty against any responsible person who possesses control over the decision to divert withholding from the IRS. The trust fund recovery penalty is equal to the income taxes, social security taxes, and Medicare taxes withheld from employee paychecks. Owners, decision makers, check signers, managers, supervisors, officers, and directors are all fair game. It is not unusual for the IRS to erroneously assess penalties against numerous individuals and allow the individuals to fight over responsibility. 

Non-Trust Fund Employment Obligations

Non-Trust Fund. Non-trust fund taxes are comprised of the employer’s matching social security (FICA), unemployment compensation (FUTA), and Medicare fund. These matching contributions come from the employer’s resources rather than being deducting from employee paychecks. If you operate under a corporate entity, you are not personally liable for non-trust fund withholdings, but they can be collected from the business accounts and assets of the business.

Non-Trust Fund Taxes Cannot Be Assessed Personally if the Business is a Corporate Entity. But trust taxes can become personal liabilities through the Trust Fund Recovery Penalty.  So, if the taxpayer is a corporation, pay the trust funds first and non-trust funds last.

Solve the Trust Fund Problem in Little Bites

Even the strongest among us can get a little rattled when facing a highly aggressive IRS employee whose sole purpose is to put you out of business or force you to pay money you don’t have. Just take a deep breath and ask yourself, “How do you eat an elephant?” Answer: “One bite at a time.” Really, that’s how you solve any tax problem, including trust fund problems—one bite at a time.

TIP A citizen can use the offer in compromise or currently not collectible or partial pay to deal with trust fund penalties. These strategies are discussed in later chapters.

Three Critical Action Steps You Must Take to Avoid a Payroll Tax Crisis

One: Anticipate IRS Enforcement Action. You need to know what the IRS is going to do and take action accordingly. You must prepare a defense in advance and this means having a clear understanding of what action the IRS will take before they take it.

The IRS gathers information to determine personal liability of the Trust Fund Recovery Penalty by using Form 4180, Report of Interview with Individual Relative to the Trust Fund Recovery Penalty. Take caution because this form is used to cast a wide net and hold as many individuals as possible personally responsible for the penalty. The IRS will quickly prosecute trust fund assessments, even from individuals who should not be held liable.

The IRS will collect the tax from the business. If it’s a corporate entity, the IRS may attempt to apply the non-trust fund payments first. Therefore, if you are going to make payments, designate those payments toward the trust fund liability.

The IRS may attempt to shut down the business and force the sale of assets and receivables. You can resist this, but the IRS will not allow a business to continue without paying all current taxes on time and having a plan in place backed by real numbers—to pay the delinquent liabilities. Do not allow your emotions and wishful thinking to cloud your good judgment and dig yourself into a deeper financial hole.

Two: Consider an Immediate Appeal. Transfer to a Collection Due Process may prevent levy action and get more time to prepare a defense. If a revenue officer shows up at your business about an employment tax issue, they are not fooling around. If they flash you their badge and make threats, they will most likely carry out those threats by attempting to shut down the business and force the sale of assets. Filing a collection due process appeal (CDP) will buy time, and the CDP transfers the case to an IRS appeals settlement officer who may be more agreeable to a deal.

Three: Formulate a Resolution. This will be an installment payment plan or uncollectible status or settlement. Do you want to keep the business going? If “yes,” your plan submitted to the IRS is often not unlike a plan under the Bankruptcy Code. Use realistic numbers and financial statements. It entails demonstrating to the IRS that the business can continue and pay back what is owed.  

Hardship as a Defense 

Interestingly enough, the investigating revenue officer has discretion not to hold you personally responsible if you can demonstrate that payment of the trust fund recovery penalty will create hardship for you and your family and that your assets are of minimal value to the IRS. See Internal Revenue Manual § 5.7.5.1(2) and § 5.7.5.3.1 for further explanation of trust fund defenses.

Bottom Line - Take Action! Don't Wait!

For a free, confidential consultation on any tax issue your business may have, give me a call. I'll talk with you for free and provide a specific action plan in that initial consultation.

Call Michael Mack at 800 659 0525 or 414 771 9200, day or night.