Just like a personal IRS tax debt, back payroll taxes can be negotiated down using the IRS Offer in Compromise program. This article will discuss the six advantages of using an Offer in Compromise to settle back payroll taxes, along with giving some warnings about the program.
Yes, a running business may absolutely settle back payroll taxes with an Offer in Compromise
The IRS is "granted broad authority to compromise tax liabilities." This includes payroll tax debts that stem from unpaid payroll deposits. Contrary to what some may say, a business does not need to be defunct in order to have an Offer in Compromise for its back payroll taxes settled. In fact, the Offer in Compromise program can be the best way to get a business back on track. The advantages:
1. A More favorable repayment schedule
A collection alternativet to repay back payroll taxes is often an Installment Agreement. With that option, the IRS wants a set amount of payments every month. Because the IRS is so serious about unpaid payroll taxes, a Revenue Officer will be trying hard to make that monthly payment as high as possible. But monthly payments destroy cash flow, and if there is anything a business trying to recover needs…it's cash flow.
If, on the other hand, an Offer in Compromise is prepared properly, a business owner will be able to take advantage of more flexible repayment terms that let your cash work for you now. This will give some breathing room — instead of watching cash immediately go out the door to the IRS with an unaffordable payment arrangement.
2. You can direct payments to the Trust Fund Penalty Taxes
What is the trust fund penalty? It's the part of your payroll taxes that make up what your employee's withholding is. The IRS gets real nasty when businesses owners don't make payroll deposits. The IRS will look to assess this part of the back payroll taxes personally to people it feels are responsible.
This personal liability can't be discharged in bankruptcy, and the IRS will look to a business owner's entire personal assets to get paid back. So wouldn't it be nice if you could direct some of what you are paying back to this Trust Fund Portion of your back payroll taxes? Well, you can with an Offer in Compromise. Even if an Offer in Compromise fails, any money that you paid in goes to reduce your personal liability.
Compare this with an installment agreement for back payroll taxes — directing payments towards the trust fund recovery penalty will actually default the installment agreement.
3. You can avoid paying the Trust Fund Penalty personally — if done right.
If your business does not repay the trust fund recovery penalty, you will be paying it personally. When you are repaying it, you will have to pay it from your post-tax dollars. This is why it is important that your offer be for at least the trust fund amount. If the business does not pay the entire trust fund amount, you will, personally.
4. The Offer in Compromise is NOT Considered by your Revenue Officer.
A Revenue Officer will make a determination if an Offer in Compromise is "processible." Once that is done, the Revenue Officer is no longer involved in the case until the Offer in Compromise is accepted or rejected. A Revenue Officer is not involved in deciding if the Offer in Compromise is in the IRS' best interest. Rather, an Offer in Compromise Examiner is.
Compare this to an Installment Agreement. That amount is negotiated with a Revenue Officer. This can be frustrating if the Revenue Officer assigned to your case is overworked and/or burned out. We find that Revenue Officers may let their personal feeling intrude on what a business should repay, whereas an Offer Examiner tends to be less passionate. Appeals officers, if needed, can be quite reasonable and have wide authority to accept deals that will keep a business running, and employees employed.
5. No interest on repayment
Let's say you owe $200,000 in back payroll taxes. After calculating your financial forms, you have the ability to pay $200,000, you just need some time. Would you be better off with an Installment Agreement or an Offer in Compromise? With an Installment Agreement, you will end up paying more than $200,000 as the IRS will charge interest. However, if your Offer in Compromise was accepted for $200,000…that is all you will pay back. You are talking about an easy savings of tens of thousands of dollars. For a business that got hit with a payroll tax problem that could make a huge difference in future viability.
6. Collection hold in place
Once the Revenue Officer marks the case "processible," there will be no collection action. So, a business can breathe easy and focus on improving cash flow, rather than worrying about who the IRS is going to levy next.
Now some of the warnings:
You must stay current
Do NOT run up a new payroll tax debt while your Offer in Compromise is pending. It is so hard to convince an IRS settlement officer that you are a good candidate for an Offer in Compromise when you immediately run up a new debt. If you can't stay current, you will need to consider your options, such as shutting the business down and applying the assets towards the Trust Fund Penalty, or laying off employees.
Don't lowball
If you lowball, the IRS will likely not accept your Offer in Compromise. Also, if you lowball an Offer in Compromise, that just means the Trust Fund portion will have to be paid personally by you.
Yes, you can personally file an Offer in Compromise to settle the trust fund when it is assessed against you, but this should be a last resort — you want your business to pay the trust fund and not your own personal assets.
Your business financials need to support it.
If you have too much or too little "collection potential" an Offer in Compromise will not be the best resolution for you. There is an optimum amount to offer, and this is where the nuances of an expert payroll tax negotiator will come into play.
A back payroll tax problem might not be the end of the world
You may feel bitter, angry, frustrated, ashamed about owing the IRS back payroll taxes. But guess what? Plenty of businesses had problems and were able to turn them around. For us, payroll tax cases are the most enjoyable to work— true, they are the most challenging, but we have the opportunity to deliver the most amount of value.
When trying to fix a business, we remove the IRS from the equation to focus on the bigger issues. Why is there not enough cash coming in? Where are the opportunities? How can we get more for less? Once there is a viable plan to turn the business around, we then add the IRS back into the picture, repaying them in an amount and manner that is manageable.
If you need assistance with a payroll tax issue, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com. Any information you share with us will be kept confidential.
