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IRS Enforcement Options For Payroll Tax Debts: A Comprehensive Review

Education & Training with Tax Rep LLC

Businesses that fall behind with payroll taxes are the number one source of new clients for most tax rep professionals.  The IRS takes payroll tax debts very seriously, as it is a double whammy on the government: it does not receive the tax money, and yet it will be issuing refunds to the taxpaying employees when they file their 1040 tax returns.

So the IRS has a letter it sends to employers, Letter 903, that outlines the number of enforcement actions that may occur if the employer does not change course and pay the taxes.  These include any and all of the following:

  1. File a Notice of Federal Tax Lien (NFTL) to protect the government’s interest. By filing this notice, we are making a legal claim to your property as security for the payment of your tax debt. An NFTL is a public notice to your creditors that we have a claim against all your property, including property you acquire after we file the lien. An NFTL can have a negative effect on your credit rating.
  2. Issue a levy against the business’s assets. We may also seize (levy) your property. A levy is a legal seizure of property to satisfy a tax debt.
  3. Assess a trust fund recovery penalty under Internal Revenue Code Section 6672 for the unpaid trust fund taxes. We can assess a trust fund recovery penalty against anyone who is responsible for, and willfully fails to, collect, account for, or pay to the IRS income and employment taxes the law requires to be withheld.  Willfulness exists if a person allows payment of net wages when the employer has insufficient funds to pay the taxes or uses withheld taxes for other purposes. Willfulness also exists if a person who knows of a previous failure to pay taxes allows payments to others (including payment of additional wages) rather than using available funds to pay the tax delinquency.
  4. Refer the matter to the Department of Justice (DOJ) to institute a civil suit for an injunction against the employer.  In a civil suit, the DOJ can seek an injunction that requires the employer to comply with the federal employment tax laws and prohibits the employer from paying any amounts until the employer pays the correct amounts to the IRS. The DOJ may also ask the court to appoint a receiver to take control of the business to ensure tax compliance. 
  5. Seek criminal charges and prosecute the employer’s owner(s). The DOJ can also pursue criminal charges based on the willful failure to report and pay over withheld taxes (Section 7202 of the Internal Revenue Code). Willfulness is evident if an employer paid net wages and didn’t leave enough funds to make the required tax payments or used withheld trust fund taxes for other purposes. Convictions may result in imprisonment and other penalties. Other criminal statutes may also apply, like tax evasion (Section 7201).

If you or someone you know has a tax issue and needs help, please feel free to contact me either at egreen@gs-lawfirm.com or at (203) 285-8545.

Eric L. Green, Esq.

Green & Sklarz LLC

1 Audubon Street, 3rd Floor

New Haven, CT 06511

(203) 285-8545



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