Settling a Payroll Tax Debt Using an Offer in Compromise

Payroll tax issues can be particularly problematic due to their complexity and the ease with which they can quickly rise to unmanageable levels. Even a simple mistake could lead to a massive tax debt in just a few months. Luckily, there’s a way to settle these tax balances for less than their full amount with an offer in compromise.

The problem is that the offer in compromise process can be more complicated when trying to resolve payroll tax compliance challenges. Read on to learn more about how the Law Offices of Stephen B. Kass can help you with your payroll tax problem.

Key Takeaways

• An offer in compromise (OIC) provides an opportunity to settle a tax debt for less than the full amount.
• Unpaid payroll taxes are particularly thorny tax debts to resolve with an OIC because of the “trust fund” aspect, which can make the process more complicated with the added element of the Trust Fund Recovery Penalty.
• If an OIC isn’t an option for addressing payroll tax debts, there may be other options available, such as CNC status or an installment agreement.
• Whether using an OIC or another tax resolution method, consulting with a tax professional is strongly recommended when dealing with payroll tax problems.

What Makes Payroll Tax Problems Especially Serious

The IRS prioritizes unpaid payroll taxes over many other unpaid taxes because of the nature of the missing money and what it represents. At a minimum, unpaid payroll taxes are funds the federal government needs for essential government programs (like Social Security and Medicare benefits). While this could be argued concerning most unpaid taxes, what makes payroll taxes different is that the employer isn’t holding on to its own money, but the money of its employees.

In other words, the employer isn’t just failing to remit taxes, but they’re also taking money that belongs to someone else (the employee) and keeping it for themselves. As a result, the penalties for payroll tax problems are especially severe, the most notable being the Trust Fund Recovery Penalty (TFRP).

What is the TFRP?

Specifically, the TFRP is equal to 100% of the unpaid taxes that were withheld from employees’ paychecks. But that’s not the worst part. Normally, if a business fails to pay its taxes, the business itself is liable for them. But when it comes to payroll taxes, the IRS can assess a Trust Fund Recovery Penalty (TFRP) against any individual who may have been responsible for the payroll taxes not being paid.

To illustrate, imagine your business withheld $100 in payroll taxes from an employee’s paycheck. The business is liable for these taxes, but the IRS can assess a $100 TFRP against any individual responsible for the missing payment.

If you’re the owner of the company, your business now owes $100, while you personally owe the $100 penalty. In contrast, if you’re an employee who was responsible for the unpaid payroll taxes, you may incur the $100 penalty but the business itself still owes the $100 tax.

Those numbers are just for illustration – these penalties never really get assessed on tax liabilities that are that low. In fact, with large or even medium-sized businesses, unpaid payroll taxes and the TFRP can snowball quickly. For instance, say a business has 20 employees, they earn an average of $4,000 per month, and the employer withholds about $500 from their pay monthly.

If the business misses one quarter (three months) of payroll deposits, it now owes approximately $30,000 in withholding tax plus the employer’s matching payments for Social Security and Medicare. That means the business owes around $48,000, and if the IRS assesses a TFRP, it will be $30,000.

As you can see, any mistake with payroll that results in the IRS not getting the payroll taxes owed must be dealt with as soon as possible. Waiting too long can easily result in a massive tax bill that many businesses would struggle to fully repay. This is why the offer in compromise is a popular way to settle payroll tax debts with the IRS.

What Is an Offer in Compromise?

An offer in compromise (OIC) is one of the most popular options for resolving tax debts with the IRS as it allows taxpayers to settle the debt for less than the full amount. The IRS will agree to an OIC in three scenarios:

• Doubt as to Collectability: This is the most common reason for the IRS to accept an OIC and occurs when a taxpayer’s income and assets are less than the total tax debt.
• Doubt as to Liability: There’s a legitimate question as to the amount of the tax debt and/or the taxpayer’s liability for that tax debt.
• Effective Tax Administration: There’s no question as to the taxpayer owing the unpaid taxes or what the amount is. However, due to exceptional circumstances, it would be unfair to collect the full tax amount or doing so would create an unreasonable economic hardship on the individual taxpayer.

Why Payroll Tax OICs Are More Complicated

The fact that the taxpayer took someone else’s money and failed to properly remit that money to the IRS for payroll taxes creates an added element of complexity to the OIC process. This can also make it harder to convince the IRS to agree to accept the OIC.

Generally, the IRS will only accept an offer from a business that is no longer operating. However, there are exceptions to this rule. It’s also critical to note that a business taxpayer isn’t eligible for a payroll tax OIC unless the trust fund portion of the tax is paid or the IRS has identified all responsible individual(s) subject to the TFRP.

How to Apply for a Payroll Offer in Compromise

The exact OIC process depends on the type of taxpayer requesting it and the basis for the request. Business taxpayers submitting their request based on effective tax administration or doubt as to collectibility will need to submit:

• IRS Form 656, Offer in Compromise
• IRS Form 433-B (OIC), Collection Information Statement for Businesses

Business taxpayers submitting their request based on doubt as to liability must instead submit:

• IRS Form 656-L, Offer in Compromise (Doubt as to Liability)
• IRS Form 433-B (OIC), Collection Information Statement for Businesses
• And possibly Form 433-A (OIC) for owners of the business

Regardless of which process is used, the taxpayer will need to pay an application fee (unless the request is based on doubt as to liability) and select one of the two payment options:

• Lump Sum Offer: The offer amount can be paid in five or fewer installments within five months of the IRS accepting the offer. The first payment of 20% of the offer amount must accompany Form 656.
• Periodic Payment Offer: The offer amount can be paid in six or more monthly installments within 24 months of the IRS accepting the offer.

After the IRS receives the necessary documents and information, the review process begins. This can take many months, although if the IRS doesn’t decide within two years of receipt, the OIC is deemed to be automatically accepted. After review, the OIC can be:

• Accepted: In this case, the taxpayer must make all payments and file all required tax returns. Any tax liens already in place will remain until all of the OIC terms are satisfied.
• Rejected: The taxpayer may appeal the decision by requesting a conference (using IRS Form 13711, Request for Appeal of Offer in Compromise) with the Independent Office of Appeals within 30 days of the date listed on the OIC rejection letter.

Because many payroll tax problems also include a TFRP, the OIC application process may involve a more complex process. However, the exact details depend on the business’s structure and who the TFRP was assessed against.

Impact of the Trust Fund Recovery Penalty

If the IRS accepts the business taxpayer’s OIC, it doesn’t necessarily resolve the TFRP liability. Again, the TFRP gets assessed against individuals, not against businesses.

If the business is a sole proprietorship, the owner may owe both the payroll taxes and the TFRP as an individual, and the IRS may allow them to lump both the penalty and the payroll taxes together when applying for an offer.

In contrast, if the business is a corporation, the business itself may have to apply for an offer on the unpaid payroll taxes. Then, any individuals responsible for the TFRP will have to apply separately for an offer in compromise.

However, individuals may end up dealing with a TFRP on their own – for example, this happens if the IRS assesses a TFRP against an employee of the company or a third party, such as an accountant. Individuals who wish to settle their TFRP must file IRS Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals.

The TFRP can be assessed against multiple individuals, but the IRS will only collect the penalty once. If one person gets an OIC settlement on their TFRP, the IRS will go after the remaining responsible parties to collect the remaining penalty. The reverse is also true – if someone pays the penalty, the others are off the hook – unless the person who paid brings a civil lawsuit against them.

Payroll Tax Offer in Compromise Alternatives

If your business isn’t eligible for an OIC, there are other payment alternatives available. A tax professional can help you decide which one is best based on your particular situation.

Installment Agreements

There are two popular types of installment agreements for paying off payroll taxes. The first one is the In-Business Trust Fund Express Installment Agreement (IBTF- Express IA). This is typically available if your business:

• Owes $25,000 or less in payroll taxes, and
• Can pay off the entire payroll tax debt in 24 months or less.

Two major benefits come from the IBTF-Express IA. First, you don’t have to provide extensive financial information to the IRS to qualify. Second, there’s a reasonable chance that the IRS will not pursue the TFRP if your business qualifies for the IBTF-Express IA and the unpaid payroll taxes are only from the current or prior tax year.

If your business has an unpaid payroll tax balance that’s more than $25,000 or needs more than 24 months to pay off the payroll tax amount, then a non-express installment agreement is available. While this is helpful for large tax balances or if you need more time to pay, it comes at the cost of requiring additional financial disclosures (such as Form 433-B). Additionally, the IRS is more likely to pursue a TFRP with a non-express installment agreement than with an IBTF-Express IA.

Currently Not Collectible (CNC) Status

In situations where your business agrees it owes the unpaid payroll taxes, but can’t afford to pay them (even in monthly payments over several years), then the IRS may agree to place your business’s tax account into Currently Not Collectible (CNC) status. CNC status means the IRS temporarily agrees to stop collection enforcement actions until the financial situation improves for your business.

As nice as this tax collection reprieve is, there are two things to keep in mind. First, interest and penalties could continue to accrue while collection enforcement activities are on hold. Second, the IRS will likely request extensive financial information to serve as proof that your business is in such financial hardship that making almost any meaningful back tax payment is economically impossible.

The IRS doesn’t grant this status easily to businesses – in fact, the IRS may even deny a payroll tax payment plan if it appears that your business can’t afford payroll taxes. Instead, the IRS will reject your payment plan request, file a tax lien, and eventually go after your business assets.

Get OIC Help With Your Payroll Tax Debt

Whether you decide to submit an OIC to the IRS or try another option, it’s a good idea to get the help of a tax professional with experience handling payroll tax problems. To learn more, contact the Law Offices of Stephen B. Kass, P.C. to schedule a consultation.