How to Negotiate Payroll Tax Debt With the IRS

Staff Writer
October 20, 2017
How to Negotiate Payroll Tax Debt With the IRS

Having payroll tax debt is one of the most serious issues you can face with the Internal Revenue Service (IRS). In fact, since collecting unpaid payroll tax is the top priority of the IRS, collections officers waste no time in pursuing you for the amount you owe. The consequences of having unpaid payroll taxes can vary depending on your situation, but if the tax debt remains unpaid, the IRS can pursue you using standard collection procedures, resulting in liens and levies to collect the amount you owe. But do you have any ways to negotiate payroll tax debt?

If you do have payroll tax debt , you are probably feeling overwhelmed and stressed, especially if you do not have the funds to pay the back taxes in full. Fortunately, the IRS is open to negotiations and has options available, so do not be afraid to contact your assigned revenue officer to work out the late payments.

Consequences of Not Paying Back Payroll Taxes

The IRS starts the collection process by sending a letter to assess your penalties and demand immediate payment. If you fail to respond to this letter and refuse to take action, harsher collection tactics begin. You’ll face many consequences from not paying payroll tax debt on time, including tax liens, wage garnishments, bank levies, property seizure, and jail time.

  • Tax lien: The government can claim first rights to your property over any other creditors.
  • Wage garnishment: The IRS can withhold a certain percentage of your paycheck to cover unpaid taxes.
  • Bank levy: Tax authorities can contact your bank to put a hold on account funds to seize them to cover unpaid taxes.
  • Property seizure: The IRS can take away your house, car, boat, and any other assets of value.
  • Jail time: Incarceration for unpaid taxes is possible depending on the circumstances.

Ways to Negotiate Payroll Tax Debt

Those who have payroll tax debt have several options. Find out how to negotiate delinquent payroll tax debt:

Take the IRS Trust Fund Recovery Penalty

You do not want to avoid unpaid payroll tax debt because you will eventually have to deal with them. Usually, ignoring them results in facing fines with unpaid trust fund taxes assessed against you or your spouse. These taxes cannot be discharged in bankruptcy.

Unlike trust funds for the wealthy, the IRS Trust Fund Recovery Penalty is an assessed tax against taxpayers who said they would send money to the IRS but who have failed to do so. Individuals who face an IRS Trust Fund Recovery Penalty are typically employers who fail to forward withheld taxes on behalf of their employees.

This penalty can be assessed against anyone who has a hand in the nonpayment, not just business owners themselves. The IRS can impose the penalty on as many people involved in the failure to pay until one or all people involved pay off the debt.

You have a few options with the IRS Trust Fund Recovery Penalty:

  • You may appeal the Trust Fund Recovery Penalty being imposed against you. If you lose, you can choose to take the case to tax court.
  • Another option is to file an offer in compromise (see section below) to settle the penalty, as you can negotiate the Trust Fund Recovery Penalty to an extent. You cannot, however, discharge this penalty in Chapter 7 bankruptcy.

Request an Installment Agreement

Your IRS revenue officer may allow you to repay the debt in an installment agreement. As long as you can pay the debt in full, you can avoid interest, penalties, and added fees associated with setting up the agreement. In order to qualify, however, you must file all necessary tax returns.

An installment agreement is an agreement you make with the IRS that allows you to pay the taxes you owe within a predetermined time frame. To avoid collections, you should ask for an installment agreement as soon as you realize you cannot pay your taxes in full by the due date. Requesting this agreement can help you avoid tax liens and levy actions, essentially extending the amount of time you have to pay the debt.

You have various options for setting up an installment agreement.

  • You can choose a short-term agreement with automatic payments that pays off the debt within 120 days or less.
  • Long-term payment agreements give you more time, but this arrangement costs money to apply for these solutions, and you will still have to deal with accrued penalties and interest.
  • If you have selected a short-term agreement but need more time, you can pay an extra fee to apply for a change in an existing payment plan.

Request an Abatement or Extension

In cases where your business has not accumulated substantial penalties, requesting a short extension as detailed above can be enough to help you. When penalties and interest have already accrued, however, you may want to ask for an abatement, especially if you can explain why you do not think your business owes the money or you can detail an unexpected event that prevented you from paying. You can apply an abatement or extension in situations involving payroll or small business tax debt.

Unfortunately, when small businesses fail to pay taxes on time, added penalties can easily amount to 15 to 20 percent of the balance owed to the IRS, which is significant if entrepreneurs are already struggling to pay their tax bills. If you were the victim of a catastrophic event, illness, or employment issue, the IRS is open to hearing your arguments for reducing or eliminating the penalties and interest imposed on you.

To ask for an abatement, you would need to file Form 843, Claim for Refund and Request for Abatement. You may qualify for relief of tax penalties if you have:

  • Arranged to pay the taxes due by a certain date
  • Filed all required forms for an extension
  • Avoided any penalties for the previous three tax years

Be sure that you owe the taxes in question before requesting an abatement, as you will need to pursue a different course if you feel you do not owe the debt.

Make an Offer in Compromise

The IRS may accept an offer in compromise, which is a fraction of the debt owed paid in either a lump sum or in another short amount of time. Negotiating this offer is difficult as the IRS accepts only 10 to 15 percent of offers in compromise. As such, you may need to hire a tax attorney.

To qualify for an offer in compromise, you must convince the IRS that this method is the best way for tax officials to obtain the money from you, all without much expense to the government. When requesting this offer, you can face many hurdles and requirements to overcome, which is why pursuing the negotiations alone can be challenging. To know whether the offer in compromise is a good option for your situation, complete the Offer in Compromise Pre-Qualifier tool. If the result indicates that you may be eligible for an offer in compromise, you may want to contact a tax attorney to help you move forward.

Consider Tax Deferment Options

If someone has payroll tax debt but does not have the financial means to pay them, the IRS may consider the debt “Currently Not Collectible.” This condition is essentially a deferment status that gives someone more time to gather the money. In order to qualify, you must prove undue hardship showing that little money would be left each month after paying essential living expenses.

The main benefit of this option is that the IRS will hold off on collecting your back taxes. You will not need to set up an installment agreement, and the tax authorities will not contact your employer or bank to garnish your wages or place a levy on your accounts. Essentially, the IRS stops collection activity.

While this method may sound like a great idea, especially if you are struggling to make ends meet, it is only a deferment option and will not make your tax bill go away. You still owe the money and the balance will continue to accumulate interest and penalties. The government will also hold onto your future tax refunds to apply them to the outstanding balance. Even so, proving financial hardship can give you some time needed to deal with your debt.

Request Innocent Spouse Relief

The IRS will exhaust all possibilities for collecting unpaid payroll taxes, including pursuing a spouse or co-owner. Requesting an Innocent Spouse Relief should be a first step for people who want to keep their spouses safe from levies and garnishments. If you find yourself pressured to pay back taxes because your spouse or former spouse failed to pay, you should ask for Innocent Spouse Relief as soon as possible.

The IRS may pursue you for a spouse’s taxes for any of the following situations:

  • You filed a joint return.
  • The gross income received by your spouse was not reported.
  • Your spouse claimed improper deductions.
  • The IRS determined that your tax totals should be more than the amount indicated on the return.

In cases where you had only some knowledge of erroneous items filed on your return, you may qualify for partial relief based on the portion of the item for which you did not know.

No Matter the Tactic, Hire an Expert

In many cases, a business owner owing back taxes will not want to communicate with the IRS alone. Hiring a tax attorney, accountant, or debt company to represent your interests could mean paying less money than you actually owe. You will have a professional to negotiate payroll tax debt for you. Experts are more knowledgeable of the IRS’s options and can discuss them with the IRS officer. Not all tax resolution companies are the same, however.

You will need to do research to select the best company that will work with you to negotiate your tax debt. Getting a free consultation is a good way to get a feel for the company and the types of services it may be able to offer to you.

Another great part about hiring an expert is having a contact person who can answer all your questions about the IRS’s options, policies, and penalties. Having someone in your corner who can explain exactly what is happening can help you better understand why you found yourself in your situation in the first place and how you can avoid it again in the future.

Dealing with unpaid payroll taxes is a nerve-wracking experience, but knowing that you have options is helpful. The IRS offers a variety of programs to help Americans get out of tax debt, and companies exist that can help negotiate payroll taxes on your behalf. As long as you act quickly and enlist the help you need from the start, you can reach a solution that satisfies both you and the IRS.

Explore how Solvable can help you get a handle on your tax debt by helping you understand all of your options.

Image via Flickr by kenteegardin

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