Tax delinquencies happen to the best of businesses. Yet no matter what led to you falling behind, the IRS expects payment of this tax obligation on time and without fail.
If you’ve fallen behind and owe back payroll taxes, it’s important to take immediate action. One way to remedy this issue is an Offer in Compromise (OIC), which is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed.
What Are Back Payroll Taxes?
You are responsible for collecting and paying trust fund taxes like Social Security, Medicare, and federal income taxes and remitting them to the IRS on your employees’ behalf. When your business fails to withhold and pay payroll taxes, the IRS aggressively seeks to recover them, assessing the Trust Fund Recovery Penalty (TFRP) against any employer or employee responsible for collecting, accounting or paying the taxes who willfully fails to collect and pay them. The penalties and interest that occur for non-payment are steep, meaning what you owe on back payroll taxes can quickly add up.
Settling Your Back Payroll Taxes Through an Offer in Compromise
The IRS offers tax resolution to all types of taxpayers but makes it more difficult to negotiate a payroll tax resolution. An Offer in Compromise (OIC) is one avenue to explore to settle your back payroll tax liabilities.
An OIC lets you settle your back payroll tax debt for less than the full amount you owe. When determining if you qualify for an OIC, the IRS considers a distinct set of facts and circumstances including your:
- Ability to pay
- Asset equity
The OIC program is not the right solution for every business. The IRS typically turns down an offer if your business could pay the full amount through an installment agreement. But it generally approves it when the amount you offer is the most it can expect to collect in a reasonable amount of time.
Before the IRS will consider your OIC, your business must be current with all filing and payment requirements. A TaxLane specialist can assist you in an offer in compromise pre-qualifier that will indicate whether you’re able to submit an OIC.
Your OIC application must also include an initial offer payment. The amount of the initial and subsequent payments depends on the total amount of your OIC and which payment option you choose, a lump sum cash or periodic payment.
With lump sum cash offers you’re required to pay an initial amount of 20% of the total offer with the remaining balance paid in five or fewer payments within five or fewer months of the date your offers accepted.
Periodic payments require the first payment with the offer and the balance paid monthly within six to 24 months. These payments must continue to be made even if the IRS has not yet approved your OIC. If you fail to make a payment, your offer will be returned and there is no appeal. There are exceptions for people filing as an individual.
If and when your OIC is accepted, the payments made during the offer process are applied to your offer amount.
You must continue to timely file and pay all estimate payroll taxes moving forward. If you fail to do so within the five years after your OIC is accepted, your offer may be defaulted. You’ll then be liable not only for the original tax debt (less payments made) but all accrued interest and penalties.
Finally, the valuation of business assets can be complicated but the benefits of getting your OIC right is worth the trouble. For example, in some cases, equity in income producing assets may be excluded and accounts receivable may also be removed. Or if you must close your business, the IRS will consider the fact that its revenue is dramatically decreased.
Lean on a Trusted Expert to Protect Your Business Finances
We recommend that you not deal with the IRS directly on a back payroll tax issue. A qualified tax specialist can ensure you’re submitting an OIC that is in your business’ best interests and offers the greatest opportunity to get an offer in compromise approved.
If you currently have a back payroll tax situation, it’s imperative to have a competent tax professional on your side. Contact TaxLane today to learn how to settle back payroll taxes, achieve financial freedom, and ensure your business’ prosperity now and in the future.