There is something called the “TFRP”, which is the Trust Fund Recovery Penalty. It is a penalty imposed by the IRS on businesses that fail to pay employment taxes as required by law. The taxes due are Social Security, Medicare, and federal income taxes (all withheld by the employer). The penalty was created so that people couldn’t “hide” behind corporate entities to avoid payment; it makes corporate officers or LLC members personally liable for the taxes.
How payroll tax issues arise
As I was doing research for our payroll tax video, I came across an article written by a “US Business Law/Taxes Expert” who shall remain nameless (mostly because she irritated me). She wrote an article about the Trust Fund Recovery Penalty, and wrapped it up by saying “Avoiding the Trust Fund Recovery Penalty is easy. Just pay employment taxes when they are due.”
It always bothers us when our clients tell us that other ‘tax resolution companies’ (or CPA's, or attorneys, or their friends or family) have said to them “Well, why didn’t you just pay your taxes on time? Then you wouldn’t be in all of this trouble!” To me, this is one of the most insulting things that can be said to you. We deal with so many clients that have fallen into payroll tax problems, and over 98% of the cases we have seen are due to cash flow problems.
You had a great idea, a business that was thriving. Then out of nowhere, circumstances arose that made you miss a payroll tax payment. All of a sudden you found yourself playing ‘catch up’ with the IRS while still trying to keep your business afloat. Now you have no idea on how to fix the issue, and you just throw money at whichever fire you think needs to be put out first. This is the incorrect way to handle a payroll tax issue. You’re creating pyramiding liabilities and not addressing the underlying cause of the problem.
To dig yourself out, know what not to do
If you have payroll tax debt, the first thing that happens is you’ll get a visit from an IRS Revenue Officer. They will most likely show up at your place of business (they are required by law to make first contact in person).
The Revenue Officer is going to try to convince you that you need to pay everything back as quickly as possible. This is for their benefit; they know that if the tax debt is not paid back within 2 years, the chances of them ever getting paid back are slim. They may tell you to just borrow the money from a friend or relative, or to dip into your retirement plan… or how about you tap into that equity on your house?
If you say that those are not options (which is what you should do), the next thing the Revenue Officer may recommend is setting up a two year installment agreement. Don’t give in – an installment agreement for a business that is already struggling with a cash flow problem is not a good idea. Realistically, you probably can’t afford to get current AND pay an installment agreement. If you do agree, you may eventually find yourself in default of the agreement and then the IRS comes back… even harder.
The last thing you shouldn’t do is pay for something you’re not liable for. You are responsible for paying the ‘trust fund’ portion of the taxes, and this is where you should direct your payments to.
You need a plan
The first thing you should consider doing is hiring someone to help you. You may think “Well, I’m just going to pay back the debt, so why do I need to do that?” Having someone on your side who knows how to deal with the IRS is priceless. The IRS is less likely to bully an attorney, and a good attorney will know all of the negotiation options that you may not even begin to consider.
You need to know where to allocate your resources to, and the next step you should take is to get current. If you don’t address the root cause of the problem you will exhaust your resources and that problem will return full force in the future.
Make Uncle Sam your lender
An Offer in Compromise is a viable option if you qualify (you’re struggling with payroll tax debt, so there’s a good chance you would qualify). This is a little known option; people usually assume an Offer in Compromise is only used to settle personal tax debt, but it can be used for businesses too. If done right, you could save a bunch of money, reduce penalties and interest, and get better timing on your repayment plan.
Another option may be filing for Hardship Status — we’ve negotiated these deals with the IRS before. We simply explained that the cash flow for the business was all over the place, and said that if you squeeze our client too hard you may just force him to shut down, and everyone will lose their jobs. We told the IRS that if you give the business time to recover, we can then work on a payment plan and you’ll get your money.
We’ve had clients come to us saying they want to file for Chapter 11 Bankruptcy. This is not something we recommend often for dealing with payroll tax debts. It may offer some temporary relief, but you still won’t be off the hook for the trust fund portion of the tax debt. The TFRP “personally liable” part means just that, regardless of bankruptcy.
If you're unsure of how to tackle a payroll tax issue, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.
