Can an offer in compromise settle your payroll tax liability?

Even the best businesses can get behind on their taxes, but no matter how or why it’s your business this time, the IRS is going to expect you to pay up and settle your payroll tax. 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) is 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.

Do you have payroll back taxes?

When you have employees, you are responsible for collecting trust fund taxes for Social Security, Medicare, and federal income tax obligations on their behalf. Businesses that fail to withhold and pay these taxes are aggressively sought by the IRS for recovery of the tax liability.

More likely than not, business owners, and in some cases key employees, will be assessed a Trust Fund Recovery Penalty, which can immensely complicate a business owner’s tax problems.

Trust fund recovery penalty offer in compromise

• The business is trying to settle all employment taxes, which includes trust fund taxes and employment taxes. An OIC for trust fund recovery penalty is just settling the trust fund recovery penalty.
• The business will try to settle for an amount at least equal to the trust fund recovery penalty, that way, no “responsible parties” will have to pay it. Rather, the business will. For an OIC on a trust fund recovery penalty, an individual can attempt to settle for as low as their Reasonable Collection Potential will allow.

How an offer in compromise can help

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 substantial consideration 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 tied up 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.

How do I make an offer in compromise?

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.

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 – of course – 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 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.

For more information on how to settle your 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 unpayable tax liability.