Many business owners focus on becoming as profitable as possible, however survival in a business is not necessarily contingent upon huge margins, or market notoriety. One of the most important aspects of being a successful entrepreneur is proper planning. Since one of the costliest expenditure business owners endure is taxes, it only makes sense to make payroll taxes, both 941 filing and remittance a top priority. A comprehensive tax plan will certainly help, however if you find yourself needing to file 941’s and owing payroll taxes this article is for you.
Payroll tax debt is number one on the list when it comes to IRS collection efforts regarding unpaid taxes. The IRS has the right to seize and sell your inventory and property, seize your accounts receivables, hold owners personally liable, and even force you to close your doors. As such, you need to take certain steps to ensure you afford yourself the best resolution option available. The first piece of advice is never ignore IRS notices. Generally, the IRS will provide you enough time to consult a professional or contact them to work through the problem. Remember, the IRS is the most powerful collection agency on the planet. They should never be feared, but they should be respected. Secondly, ensure that you are current on all payroll tax deposits, as well as unfiled tax returns. This shows that you intend to get back on track and stay in good standings after your tax debt issue has been resolved. The next step is to be prepared to provide the IRS current financial data. This will include financial statements from your business, and possibly financial information from anyone who could be held liable for the tax debt. Equally important, make sure that your personal tax situation is current. It could be difficult to settle your payroll tax debt if you have back taxes, and/or outstanding tax debt on the personal side. Make sure that you have adequate documentation to substantiate items on your financial statement. For example, if your profit and loss shows you spent $24k in rent for the year in question; make sure you can provide proof of payment. In most cases, bank statements or cancelled checks would be accepted as proof.
As a business owner, you are required to hold employee tax deposits in a trust until you make federal tax deposits in that amount. Congress enacted a law that allows the IRS, under IRC 6672 to access additional penalties known as Trust Fund Recovery Penalty (TFRP). “According to IRC 6672, the TFRP is equal to the total amount of tax evaded, not collected, or not accounted for and paid over. IRC 6672 applies to the employees’ portion of employment tax, namely, the withheld income tax and employee’s portion of FICA. It does not apply to the employers’ portion of employment taxes. The TFRP also applies to “collected” excise taxes” (IRS code section 8.25.1.2). This additional penalty may apply to you if you cannot pay the outstanding tax liability without delay.
If you have an accountant, bookkeeper, or someone else responsible for collecting, accounting for, and paying trust fund taxes; they could be held liable for the tax liability as well. However, there has to be a willfulness to avoid payment. For willfulness to be present the person(s) must have been, or should have been aware of the outstanding taxes and either intentionally ignored the law, or was otherwise indifferent to its requirements. No malicious intent is required. If a responsible party used available funds to pay other creditors and the business can’t pay employment taxes, this could be looked at as an indication of willfulness. Potential responsible parties will generally be subjected to an interview to determine that person(s) duties and responsibilities before the TFRP is accessed.
Make no mistake about it. If your business owes the IRS payroll taxes they will be very aggressive in their pursuit to collect. The reason for such aggression is the funds outstanding were supposed to be held in a fiduciary trust capacity on behalf of your employees. In other words, the funds should have never been available to spend in day to day operations to begin with. The IRS also has in place what’s known as the federal tax deposit system (FTD). Its sole purpose is to alert the IRS regarding businesses that owe payroll taxes.
Remember, every day that goes by without prompt attention being given to your tax liability is equivalent to opening up your assets, bank accounts, and account receivables for the taking. The IRS may also contact your customers and order them to send monies owed to you directly to them, or file a federal tax lien under the Uniform Commercial Code (UCC), in the state capital where your business is located. This outstanding tax debt could affect your credit, your ability to borrow, and prevent prospective customers from doing business with you. It is a given that small business owners struggle with capital needs to maintain and grow the business, and owing these taxes is in no way indicative of trying to evade paying your tax obligation. With that being understood, please know that by not making your payroll tax obligation you subject yourself to huge IRS problems. It not a matter of if the IRS comes knocking, it’s a matter of when.
The good news is help is available. If your struggling financially in your business this could also indicate you’re a good candidate for Offer-In-Compromise (OIC), Installment Agreement (IA), or many other resolution options that may be available to you. I know it takes all you have just to maintain your business day-to-day. Dealing with long hold times and understanding the IRC, as it relates to your particular situation can seem overwhelming. Please do yourself a favor and take the time to contact a licensed tax professional to further discuss options that may assist you in resolving your payroll tax liability.