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Managing Delinquent Employment Tax Liabilities

Dealing with delinquent employment taxes is always a challenge. I recently negotiated an installment payment plan for a company that produces and sells alcoholic beverages. They owed about $100,000 in delinquent employment taxes but the company showed a lot of promise and solid current cash flow. They were current on all their deposits and Form 940 and 941 filings, so the question was whether an installment agreement would solve the problem.

We proposed a payment of $1,000 per month for the first year, after which the payment would escalate to $3,000 per month for the next year. After the second year, the balance of the assessment would be paid in full. The principals of the company were well satisfied that if they had two years of reasonable payments, they could pay the balance as their new product had just been released and was doing well. They made other changes to their operations that had the effect of both cutting expenses and raising revenue, including relocating their production facility to a building that offered storefront retail space in a popular shopping area. So, not only were the wholesale operations growing, but now they had a great retail opportunity and early sales showed substantial promise.

They needed to keep the IRS from levying on the income stream from their wholesale distributors and they needed to keep the IRS from filing a federal tax lien. We negotiated the installment agreement but the lien was an issue. Anytime the IRS is faced with a delinquent taxpayer (in this case, a corporation), it wants to file a lien to "protect the government's interests." And when the delinquency is that of employment taxes, the IRS is generally more aggressive with collection than it might otherwise be in the case of an individual.

There are two reasons for this. First, delinquent employment taxes are mostly comprised of the withholding for income and social security taxes that occurred on the wages of the employees. That is, the money is withheld from the employees and is supposed to be paid by the employer to the IRS. And while the IRS must give the employee credit for the withholding on his personal tax return, it does not have the cash in hand if the employer fails to pay it in. Secondly, the IRS somehow fancies itself as the guardian of non-delinquent businesses, which is ironic because it works so hard to transform non-delinquent businesses into delinquent businesses. In fact, I like to say that the IRS is the agency that handicaps the hired. Nevertheless, they seem to think that the harder they squeeze delinquent businesses, the better it is for all the other not-yet-delinquent businesses.

Despite this, the IRS issued streamlined procedures that allow businesses with delinquent employment taxes to enter into installment agreements with little or no resistance. See: SBSE Memo. 05-0311-038 (March 28, 2011). The IRS has recently updated the procedures set forth in that memo. IRS Memo SBSE-05-2013-0103 (December 23, 2013) updated the guidelines for operating businesses to obtain installment payments on delinquent employment taxes. The policy is referred to as the Express Installment Payments for In-Business Taxpayers (that is, an operating business).

The policy allows in-business taxpayers with delinquent employment tax debts to obtain an "express" installment agreement when the total liability is $25,000 or less. The term "express" agreement means that the agreement can be set up without the usual document and asset verification process that otherwise accompanies an application for an installment agreement. Moreover, the IRS will not require a field call to the business property to verify assets. Even better, the IRS does not require the case revenue officer to make a lien determination for purposes of filing the lien. Rather, no lien is generally required in these cases.

However, the business must qualify for the "express" agreement at the time it's entered into. That is, the business cannot use its first payment to pay down the balance owed to $25,000 or less. At the time the agreement is reached, the unpaid balance of the assessment cannot be higher than $25,000. Therefore, a business wishing to enter into an "express" agreement must pre-pay the amount necessary to get the balance below the ceiling before the agreement is reached.

In addition, the agreement must be set up as a Direct Debit Installment Agreement if the amount owed is between $10,000 and $25,000. Anything under $10,000 can be processed as a regular installment agreement wherein the taxpayer writes checks to the IRS on a monthly basis.

Typically, when a business has delinquent employment taxes, the agency immediately considers whether to pursue an assessment of the Trust Fund Recovery Penalty (TFRP) under code section 6672 against the responsible officers. The TFRP is an assessment of an amount equal to the trust taxes owed by the corporation as part of its employment tax debt. Trust taxes are the amounts withheld from the workers for their income and social security taxes. Only the trust fund amounts may be assessed against the corporation's responsible officers.

However, the in case of "express" installment agreements under this provision, the IRS will not pursue a TFRP if all the following conditions are met:

1. The outstanding balance is $25,000 or less (the amount required to have the "express" agreement in the first place),

2. The outstanding liabilities must be for current or prior periods (what else would they be?), and

3. The business cannot be a "repeater" when it comes to trust fund delinquencies.

The term "repeater" is defined at Internal Revenue Manual section, where the IRS actually uses the term "pyramiding" as opposed to repeater. According to the IRM, a pyramiding taxpayer is one which: a) is currently in business, b) not current with employment tax deposits for the current quarter, and c) has two or more delinquent employment tax periods assigned for collection. The IRS takes the position that, "a taxpayer that is pyramiding taxes is not demonstrating a good faith effort to comply." IRM section

So the key to avoiding a TFRP assessment in this situation is to be current with employment tax deposits for the current quarter. And in fact, that is the key to resolving any tax debt under any terms or conditions. If you are not current, the IRS will not play ball with you. If you are current, then something can always be done with regard to the back-tax debt.

This idea is what gave rise to Pilla's First Rule of Tax Debt Management: If you have money to pay the back taxes or money to pay the current taxes, but not both – NEVER pay the back taxes. Rather, use all available resources to get and STAY current, then negotiate on the back taxes in some way. But if you're not current, forget making any deal on the back taxes. It will not happen.


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