Payroll Tax Debt can become a nightmare for a taxpayer who gets behind. In addition to the potential penalties to a corporation, LLC, or partnership for unpaid taxes, there is also the potential for personal liability. When taxpayer’s come into our Richardson TX office with Payroll tax debt, one of our priorities is to minimize personal exposure while effectively removing the taxes.
Today we will discuss three strategies to reduce liability, including personally liability, if faced with Payroll Tax Debt. How you will address the payroll tax debt is highly correlated with the taxpayer’s unique circumstances. Remember from our past discussion that personal liability is based on functional tests where not only is title important, but whether the taxpayer had the ability to account for, collect, and/or hand over the payroll taxes to the government. Here’s three options for strategies.
Strategy 1 is to fight responsibility. Obtain and review pertinent information to determine if you, the taxpayer, is not responsible for the debt personally. Some of these methods will include –
- Obtain copies of the interview forms. Is anything said that clears you or that the IRS is interpreting in an incorrect manner?
- Obtain copies of cancelled check. Who signed the checks? Was it you or did someone else control which creditors were paid and when they were paid?
- Interview former employees. If former employees validate your story that they taxpayer was not responsible, get affidavits from them.
Strategy 2 is to close the company. The goal here is to reduce the liability to just the trust fund recovery penalty(TFRP).
- Cease operating and liquidate the entity.
- Reduce the liability to just the TFRP.
- Be careful when liquidating assets. Since there is a silent lien already on the assets, the assets technically belong to the government. If you distribute the assets to yourself, a favorable party, or a new business, the IRS will attempt to get to those assets.
- Alter-ego issues are where you close your business only to open the same business with a new name. If you open a new business, separate it as much as possible from the old business to protect its assets. This will include a new address, website, etc…
Strategy 3 is to designate payments to the IRS.
- If you make a voluntary payment, make it either personally or thru a loan. Under Revenue Procedure 2002-26, you can designate it to the Trust fund portion versus the business taxes. Payments from the company can’t be designated.
- Deferred payment offers can be applied against the TFRP until the offer is accepted.
- If you do not designate, the IRS will simply apply against the oldest period first and likely the non-trust fund portion first.
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