If you’re behind on your business’s payroll taxes, you shouldn’t hesitate to take action. If you don’t, you can face serious consequences. There are several ways to deal with this problem now and keep it from spiraling out of control, and an Offer in Compromise (OIC) may be one of them.
An OIC is an agreement between you and the IRS that a sum of money you pay now on your back taxes settles your liability. If accepted, you could satisfy your debt to the IRS for less than you originally owed. However, it can be hard to qualify if you owe payroll taxes, and for best results, you should consult with a tax attorney.
Key takeaways
- The IRS may be willing to settle payroll taxes in select situations.
- To qualify, you must be current on all filing and payment requirements.
- You cannot settle the trust fund portion of a payroll tax liability.
- To apply, you need to provide the IRS with a collection information statement about your income, assets, debts, and expenses.
- However, individuals may be able to settle a trust fund recovery penalty assessed against them personally.
How an offer in compromise can help with payroll taxes
If you qualify, an offer in compromise lets you get out of payroll tax debt for less than you owe. Although an offer in compromise for payroll back taxes can be difficult to negotiate with the IRS, clearing your liability for less than you really owe makes it a tempting idea for business owners.
There’s a complicated procedure to this process, but the basic concept is this: You tell the IRS what you can pay toward your tax liability right now, and it will consider whether it’s a substantial enough sum to clear you of your remaining liability.
The IRS will want to evaluate the following basic facts and circumstances about your company, including the following:
- Your ability to pay (both your current tax liability and the proposed offer in compromise)
- Your business’s income
- Your company’s expenses
- How much equity you have in your assets
The IRS leans toward taking offers in compromise if the tax debtor appears that it can recover more payment on tax liability by doing so. If the IRS determines that it can get a greater recovery from a tax debtor through an installment agreement or another means of collection (levies and asset seizure), it is less inclined to take the offer in compromise.
Will the IRS settle payroll taxes?
Generally, the IRS will only agree to settle payroll taxes if you have paid the trust fund portion of the taxes. Then, you may be able to settle the portion of the taxes related to the employer’s contributions.
To break that down, consider an employer who pays out $100,000 in wages and owes the following taxes to the IRS:
- $6200 Social Security withheld from employees’ paychecks
- $1450 Medicare withheld from employees’ paychecks
- $15,000 in federal income tax withheld from employees’ paychecks
- $7650 in employer matching payments for Social Security and Medicare
In this case, the employer owes a total of $30,300 in payroll taxes, but these taxes aren’t all classified the same way by the IRS. All of the taxes withheld from the employees’ paychecks are considered to be trust fund taxes, and they cannot be settled with an offer in compromise.
However, the employer’s matching payment of $7650 is not a trust fund tax, so it could be settled through an offer in compromise as long as the business or the business owner meets the criteria to qualify for an offer.
Can you get an offer in compromise on a trust fund recovery penalty?
If a trust fund recovery penalty is assessed against you personally, you may be able to get a settlement through the offer in compromise program. However, if the IRS has assessed this penalty against multiple people, the agency will continue to pursue those people for the remainder of the penalty once you have paid.
If a business doesn’t pay its payroll taxes, the IRS can assess a trust fund recovery penalty in the amount of the unpaid withheld taxes against individuals who may be liable for the unpaid tax. The TFRP is equal to the amount of taxes that were withheld and not paid.
How to apply for an offer in compromise on payroll taxes
To apply, you must complete Form 656 along with a collection information statement. Generally, you need to complete Form 433-B with information about the business’s finances. Then, every owner/shareholder/member will need to complete Form 433-A with information about their personal finances.
If your business is a sole proprietorship, you may only need to complete Form 433-A, as it has areas where you can include information about your personal and business finances.
If you are thinking about making an offer in compromise, you should retain a tax attorney’s professional services. While people can submit offers without a tax lawyer’s guidance, they don’t benefit from a tax attorney’s experience and knowledge in matters like these – especially when you’re dealing with business taxes.
Before you even consider submitting an offer, however, you should be sure that you are current with all tax filing and payment requirements. This demonstrates good faith to the IRS that you are trying to get right with your tax liability and can be trustworthy to work with.
When you submit your offer in compromise application, it should include an initial payment offer. How large this offer is can determine whether or not your tax liability can be settled with a lump sum or if periodic payments will follow for the next six to 24 months after the initial payment is made. If you’re applying for a lump sum offer in compromise, the down payment should be 20% of your offer. If you’re applying to pay the offer over 24 months, the down payment should be equal to one month of payments.
If the IRS accepts your offer, you must continue to file and pay all payroll taxes in the future. If you fail to do so within five years after your offer in compromise is accepted, it may default – and you’ll be back at square one. At this point, you could be liable not only for the original unpaid payroll taxes but also any interests and penalties that accrued in the meantime.
What if you don’t qualify for an offer in compromise
If you don’t qualify for an offer in compromise on payroll taxes, you may want to consider one of these options:
- Express installment agreement – Businesses that owe less than $25,000 in payroll tax and can pay off the liability in 24 months or less can qualify for an in-operation express installment agreement. You don’t have to complete a financial disclosure, and approval is usually easy to get.
- Installment agreement with collection information statement – If you owe over that threshold, need longer to pay, or have other extenuating circumstances, you may qualify for a monthly payment plan, but you’ll have to provide the IRS with details about your business’s finances.
- Currently non-collectible – This status stops all collection actions until your finances improve. It’s generally only available if your business is no longer operating, but there may be exceptions.
You may also want to ask for penalty abatement to reduce the amount you owe in payroll taxes. Talk with a tax attorney for more details. They can help you customize a solution based on your unique situation. You may also want to consider bankruptcy in some situations, but generally, you can’t discharge trust fund taxes or the TFRP in bankruptcy.
For more information on settling payroll tax, contact us today!
If you want to learn more about how an offer in compromise can help a business deal with payroll tax liability, get in touch with Damiens Law Firm, PLLC. We can help business owners like you navigate your options when you’re struggling to afford an unpayable tax liability.
