**This article is part of a larger article series titled, The 941 Payroll Tax Resolution Process. There is a specific sequential order to this series, so we highly recommend that you start at the beginning.
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The IRS has a lot of power when it comes to enforced collection, especially with employment Trust Fund taxes. The fundamental reason is because the Trust Fund taxes (withheld federal income tax, social security, and Medicare taxes from employees) are what fund the day-to-day operations of the federal government.
If you look at the Treasury Daily Statements, you will discover that payroll tax deposits are the single biggest chuck on incoming tax deposits to the government. Out of the trillions that the government spends to operate, debt financing and employment tax deposits are the two biggest chunks of funding.
The Small Business and Self-Employed division in the IRS considers the enforcement of payroll tax liability to be one of their most important jobs. Every year, this division posts their enforcement priorities list. That list will always include the enforcement of payroll tax collections.
The IRS specifically goes after those that are pyramiding their employment tax liabilities. Pyramiding means that you owe money and continue to accrue new liabilities each quarter.
The biggest offenders are those that:
- Accrue more than four quarters of 941 liability in a row
- Are continuing to accrue more 941 liabilities
- Have chosen to not make current Federal Tax Deposits
These offenders are quickly bumped to the head of the line regarding assignment to a Revenue Officer.
This is why the IRS can do some nasty things to you legally. Bring on the nasty things time!!
Nasty Thing #1 – Federal Tax Lien
The first nasty thing is a federal tax lien. Once the IRS makes a valid assessment against you, they can take actions; one of which is a tax lien.
A federal tax lien is the government’s legal claim against your property. In effect, the government is protecting their interests in your business property. It’s a leverage against the tax debt you have outstanding.
Before a lien can exist, the IRS must assess the liability. They also are required to provide a statements of that liability to you. This statement (or bill) needs to explain the amount that is owed to you.
When the IRS decides to file a lien, they will file a public document called, Notice of Federal Tax Lien. This notice will alert creditors that the government has a legal right to your property. The IRS can attach this lien to your assets (business property, vehicles and equipment, accounts receivables, etc.) They can also attach it to future assets acquired during the duration of the lien.
There are ways to get the IRS to ease up in tax liens. Three specific avenues to consider are:
Tax lien withdrawal
This is not a release of the lien within the IRS, but it does remove the public notice. Most often, the IRS will grant this to facilitate collections. They don’t want to see you in bankruptcy or they won’t be able to collect from you. This is a perfect case to request a tax lien withdrawal.
To request a withdrawal, use Form 12277, the Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. Send a copy of the tax lien along with your application. You should include multiple tax liens if you are pyramiding your tax liabilities each quarter.
The form is straightforward, other than the area where they ask you to explain the basis for the withdrawal. Give ample evidence and reasoning behind requesting the withdrawal and the consequences of the lien.
Apply directly with the Revenue Officer if they have been assigned. If a RO has not been assigned, file with Advisory Group serving your local area (see pub. 4235). You can also file these in Appeals if you are already at that stage.
Tax Lien Subordination
A lien subordination does not release or withdraw the lien. A subordination purely moves the federal tax lien to a junior position in the claim priority order. It allows another creditor to take the senior position.
To request a subordination, use Form 14134. You need to describe both the collateral in question and the lender that needs to be in the superior position. You cannot submit an application that is general in scope and doesn’t include specific assets and specific lenders.
There is a 45-day processing time, so be patient and allow the Advisory Group to do their job. They will take finance and accounting steps to review your applications and assets.
Tax Lien Discharge
This is a handy tool to discharge a specific asset from being covered under the lien. It is not a removal of the lien, but the removal of a specific asset being covered under tax lien.
Remember, a tax lien covers all rights to property and assets of the business. A discharge removes one specific asset from under the lien umbrella. It is most often used when a taxpayer is selling a business asset or piece of property.
To request a discharge, use Form 14135. Just like a subordination, you need to describe the asset, sale details and why the IRS should allow it. You also need to also cite the specific code you are requesting:
- 6325(b)(1) – The remaining assets = 2x the tax debt
- 6325(b)(A) – The IRS receives amount equal to their interest in the asset up front
- 6325(b)(2)(B) – The value of the U.S.’s interest is $0
- 6325(b)(3) – The sale proceeds are escrowed, and the IRS will get their share
- 6325(b)(4) – The 3rd party (buyer) puts up a bond for the value of the governments interest in the asset
Subordinations & Discharges
When you are ready to request a subordination or a discharge, request these specifically with the Advisory Group. Please know that they will typically require an appraisal and you will need to pay for that. Whether or not the IRS allows a subordination or discharge is likely driven by the math of the situation.
Nasty Thing #2 – Federal Tax Levy
The second nasty thing is a federal tax levy. A levy is different than a lien. A lien only secures interest in your property, a levy takes the property to satisfy the tax debt. The IRS can legally levy, seize and sell business property that you own or have an interest in. Most often, these types of properties include bank accounts, vehicles and equipment, buildings, stock, or interest in another company, etc.
Before an IRS levy process begins to take place, the IRS will send you a Notice and Demand for Payment. This will notify you regarding the tax amount owed, as well as interest and penalties that the IRS has assessed.
If you do not pay the amount assessed, the IRS will give you a 30-day levy notice. That notice is called a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing”. If you do not respond or take action to resolve the issue, the IRS will move forward with the seizure.
IRC 6343 provides reasons why a business could be granted a levy release, namely if the:
- Tax debt is paid in full
- Levy is creating an economic hardship for the business or its employees.
- CSED clock runs out
- Levy release will help the IRS facilitate collection
Most levy situations need to be looked at through the eyes of the IRS. Let’s do that with three common situations we see.
Common Situation #1
The IRS decides to seize a plumber’s work truck due to a major 941 liability. By taking that work truck, the plumber has greatly reduced his income generating potential (and therefore collection potential).
This is a situation where the IRS really should not have even seized the truck in the first place. However, often the IRS will seize the truck to get the plumbers attention.
Based on this information, the plumber has a perfectly good argument for requesting a seizure release. Keeping the work truck will reduce the IRS’ collection potential!
A release is likely, unless the IRS is ready to force a business shutdown.
Common Situation #2
The IRS decides to levy the bank account of a roofing company. It was one of many bank accounts for the business, and the IRS wanted to get the HVAC owners’ attention. Unfortunately, this specific ban account was the payroll bank account. Because of the levy, employee paychecks now will bounce, causing 3rd party harm.
The IRS has a specific mandate from Congress to not put people in a position that they cannot pay their bills. Proving 3rd party harm is a clear-cut decision by the IRS and will cause a release.
Common Situation #3
A HVAC business is viable as a going concern, but the IRS chooses to levy against the accounts receivable list. Specifically, the IRS levies against the company’s single largest customer which inherently destroys the relationship. By losing that large customer, the HVAC business would go out of business immediately. This would then result in a loss of collection potential for the IRS.
This is another great example of when the business owner could request a release. The reason? Economic hardship and a lack of collection potential for the IRS.
Nasty Thing #3 – Trust Fund Recovery Penalty
The third nasty thing is the Trust Fund Recovery Penalty. If you withhold (or don’t withhold when you should have) federal income, social security, or Medicare taxes that you do not deposit or pay to the U.S. Treasury, you may be assessed the Trust Fund Recovery Penalty.
The penalty is 100% of the unpaid trust fund taxes that were withheld by employees.
If these unpaid taxes cannot be immediately collected from the employer or business, the penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, or paying over these taxes and who acted willfully in not doing so.
The key here is responsible and willful.
Responsible – This could be:
- An Officer of a corporation
- A Partner or employee of a partnership
- An accountant or payroll professional
- A specific check signer
- Any other person or entity that collects, accounts for, or pays the trust fund taxes
Willful – This means voluntarily, consciously, and intentionally. A person that is willful is someone that knows the required actions of collecting, accounting for, and paying trust fund taxes to the Treasury.
For those responsible and willful persons, the Trust Fund Recovery Penalty will be imposed. The full weight of the IRS can pierce the corporate veil and touch you personally.
Nasty Thing #4 – Penalties & Interest
Finally, the last nasty thing is penalties and interest. Tax law dictates that penalties and interest be accrued against payroll tax liabilities that are left unpaid.
This often doesn’t supersede the nastiness of liens, levies, or the Trust Fund Recovery Penalty. However, the addition of penalties and interest on top of all of those things just makes the entire situation nasty.
In addition to the TFRP, other common penalties are Failure to File, Failure to Pay, and Late to Deposit. It is fairly common that penalties and interest alone can add 30-40% of the original amount owed. Don’t wait too long to get this problem solved or these really start to add up.
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