What Options Do I Have If My Business Owes Payroll Tax?Thankfully, you have several options. Although the IRS is historically tough on businesses that have accrued tax liabilities (the Service views it as a form of theft), several resolution options are available:
- Installment Agreement – Allows a business to pay its back tax debt over time.
- Offer in Compromise – Allows a business to settle its tax debt for less than the total amount owed. However, the Offer in Compromise is much more difficult for a business to secure than it is for an individual.
- Penalty Abatement – The IRS may consider reducing Failure to Deposit penalties by re-allocating tax deposits and removing penalties based on reasonable cause.
- Currently Not Collectible – Though a temporary resolution, Currently Not Collectible status secures a set period of time in which the IRS will suspend collection of the back tax debt.
How Do Payroll Tax Debts Differ From Income Tax Debts?Business owners with employees have the responsibility of withholding, collecting and paying tax to the IRS. Those employees, in turn, trust their employer to withhold tax from their paycheck, and send those funds to the IRS. Because the withholding and half of the FICA tax are really the employee's money, there is a heavy price to pay when those funds aren't turned over to the IRS timely. And, the IRS typically gets very aggressive when collecting back employment tax.
(In fact, the IRS has been granted the authority to collect the Trust Fund portion of back payroll taxes from both the business owner (and other Responsible Individuals) and the business simultaneously.)
What If I Use A Factoring Company To Borrow Against My Accounts Receivable?If your business has a factoring agreement with a lender, you must to do everything you can to avoid a Notice of Federal Tax Lien (NFTL) from being filed. Once a NFTL is filed against your business, the 45-day clock starts ticking. This means that 45 days after the lien is filed, the IRS has first priority rights to your accounts receivable, making your lender second behind the Service. This will cause your factoring company to stop advancing you money immediately. Your choice is simple, pay the tax debt in full and get a lien release, or enter into a formal Installment Agreement with the IRS. You'll also need to secure a tax lien Subordination from the Service.
Fortunately, the IRS is quite familiar with factoring agreements. The Service will often subordinate its lien position to that of the lender, as long as an Installment Agreement in place to satisfy the back tax debt. In the end, this arrangement keeps everyone happy. You get to keep your business open and pay your tax debt, your lender gets to keep advancing you money based on your accounts receivable, and the IRS is paid back the tax due in monthly installments.