A payroll tax problem is the most serious type of tax you can have with the IRS. The IRS monitors all employers to see if you are late with payroll deposits. If you owe IRS back payroll taxes, you will be assigned a Revenue Officer and he or she will come to your place of business and will be very aggressive about collecting from you and gathering information. The Revenue Officer will subpoena a bunch of financial documents and they may or may not show you respect and understanding. They may suggest that you borrow money to pay off your debt, and then on the other hand file a Federal tax lien against you so that you can't borrow money.
Yes, if you owe IRS back payroll taxes it is a horrible, stressful feeling. S0, if you are experiencing this, you are not alone. And through all this, 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.
"What are my options if I owe the IRS back payroll taxes?"
1. Do nothing
One option is to do nothing and hope the problem 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 jointly, they will also be assessed against your spouse. Unlike regular taxes, these "trust fund" taxes can not be discharged in bankruptcy. You will need to have someone negotiate an IRS tax debt resolution on your behalf. 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 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, hope some money will come in, hope the payroll tax penalties won't bury you
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 chance of you having another payroll tax problem is huge. Much, much more than with a business that never got behind. One reason is that you were charged 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? 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 on the repayment arrangement or come short on another payroll. In either case, you have a new payroll tax problem. The time you spend dealing with the Revenue Officer yourself could be better spent focusing on making more money. Additionally, the Revenue Officer will begin asking around to find other "responsible people" to assess the trust fund penalty against. This could be one of your key employees who had nothing to do with the problem.
4. Rope your CPA or an attorney friend into helping you
Pros: Lower upfront cost
Cons: You may forever destroy a relationship with your CPA or friend. 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 made. 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: 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 type of cases. Honestly, a tax resolution firm that is used to settling $30,000 of back taxes someone owed from 2006 can not handle finding the best resolution to an on-going tax problem that can completely destroy your and the people around you's lives. 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.
Pros: The best tax resolution law firms know how to deliver the value you need, and can limit the damage of a tax problem. In addition, they will investigate what is going on with your business 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, or a combination of these can help you 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, that in the long run, turn out to be the best money spent.