I Owe Old IRS Payroll Taxes From My Old Business That’s No Longer Open. What Are My Options?

On: January 18, 2019

The IRS takes payroll taxes very seriously. The employer is deemed to be holding these taxes in its payroll deposit account in trust for the US government on behalf of the employee. Taking and using the taxes, even if it is to keep the business open, is looked upon as theft and as stealing from the employee and the US Government. Criminal sanctions can be enforced and sentences of up to five years in prison plus fines, penalties and restitution have been known to occur when the employer has a record of constantly failing to report and make these payments. The IRS refers to this as “pyramiding” and will aggressively prosecute those involved in this type of behavior. The answer to this question depends on how old the payroll tax debts are, if you filed returns or if the IRS filed them for you, your future plans and the intensity of the IRS activities around your business and payroll tax debts. It can even entail determining whether the people who work for you are employees or independent contractors, legal US citizen or illegal immigrants. Unless you are retired or incapacitated, and have no intention of running a business again, this circumstance is an ideal situation in which to hire a tax attorney as opposed to a CPA or an enrolled agent, as certain solutions will involve business, bankruptcy and corporate law, as well tax law. A tax attorney is suggested even if you are retired or incapacitated as procedures involved in resolving these types of cases can be particularly complex. Option 1: The business is a classic C corporation. The business incurs 4 quarters of 941 payroll tax debt in the amount of $200,000. The IRS commences collection efforts against the business. As a C corporation, you, as an individual, are not liable (yet). You plan to retire. You close the business and dissolve the corporation. The IRS investigates, seeking the individual ultimately responsible for payroll taxes. We will assume it is you. The IRS will require you have a 4180 interview at your place of business (or their office if the location is no longer available). This is 10 page document asking the question: “Who was responsible for payroll tax?” You were and are. The IRS will then assess the liability against you personally under your social security number in the form of “Trust Fund Recovery Penalties.” This amount will be equal to the original assessed liabilities before interest and penalties were added. This, by itself, reduces the outstanding liability immediately. You are now retired and make $3,000 a month in social security benefits. The IRS now takes your personal collection financial statement and finds that you have no discretionary income and have no equity in assets available to the IRS. It will accept an Offer in Compromise for you as an individual for $3,000 (1 month’s income) to settle the $200,000 in old payroll taxes. The C corporation was still liable for this amount, but it was dissolves and is no longer available to be collected against. Option #2: The business is a classic C corporation and you want to continue to do business. We will assume the same payroll tax situation. The IRS has begun to circle. The FIRST thing you do is form a new C corporation and your goal is to keep that corporation is so bright, shiny and clean, you will never have tax problems with it. EVER! You hire ADP or Paychex to do payroll for the new corporation. The IRS likes this. You will not hire an internal bookkeeper. ADP and Paychex are cheaper and better. You will not do it yourself. The IRS does not like this. You are to go out and generate revenues for the new corporation. The old corporation lets go of the old employees and the new corporation hires them. You will also be hired as an employee of the new corporation and you will pay yourself only $3,000 per month (sorry). The new corporation does the work and takes in the receivables. Its only expense is payroll and perfect payroll taxes. The old corporation pays off the payables until its bank account is bare. The IRS will then commence the same process against you as in Option #1. It will not be able to touch the new corporation as it is, as a C corporation, a new distinct (very clean) legal individual and had nothing to do with the old corporation. YOU CANNOT DO THIS WITH A S CORPORATION. The IRS has “reach-through” powers concerning single entity pass-through entities. The IRS will then assess trust fund recovery penalties against you and, since this option reflects the same $3,000 a month income, no equity in available assets, profile, you can make an offer to settle the original amount of $200,000 for $3,000 as an individual. The old corporation still owes the $200.000 but it is now close and dissolved, and, as such, is non-collectible. If there are assets in the old corporation that the new corporation needs to function, the new corporation will have to purchase them from the old corporation for 80% of market value. The old corporation must then pay these funds over to the IRS while filing for a release of liens on the property/assets at issue. Liens can transfer and, with them, the original payroll tax liability. You do not want to allow that into your nice new shiny C corporation. Option #3: You run your business as a sole proprietorship. Even though you have separate EIN for the business to facilitate employee payroll and bank business, you file a Schedule C with your 1040 as opposed to a separate tax return for the business. Your payroll tax liability is incurred by both your business and yourself as an individual. You close your business, but the payroll tax liability remains on your social security number. Under this circumstance, the resolution depends on your personal situation. If you wish to continue running a business, the tax liability will follow you. You should have the new business be a C corporation. You should be an employee of the new C corporation and pay yourself $3,000 per month. The scenario will be as in Options #2. If you wish to retire your option will be as in Option #1. The primary difference here is there is no Trust Fund Recovery Penalties process. You are directly liable for the payroll taxes. Your situation dictates the resolution. Option #4: You wish to keep the business as it is open and running. You will have to enter into an installment agreement and pay you liability in full. Failure to stay current on you payroll taxes or failure to make a payment on the agreement will default it and the IRS will return to enforce its interest.