The Internal Revenue Service aggressively collects delinquent payroll taxes, and it has the authority to do just about anything to collect them. Here are five of the most aggressive tactics the agency uses.
Shut you down.
The IRS can lock your doors and shut down your business until you pay, without even getting a court order. It can also contact your customers, notify them that you’re a delinquent taxpayer and instruct them to send payments on their accounts to the IRS instead of to you.
Raise your borrowing costs.
If the IRS puts a lien on your business, your lending risk dramatically increases. If you were to file bankruptcy with an IRS lien, the IRS gets paid first, before any other creditor gets any money. If you have factoring agreements, your lender might cancel your contract because it becomes a secondary creditor behind the IRS.
Penalize you multiple ways.
The IRS assesses more than one penalty when you don’t pay your payroll taxes. If you don’t file, you’re assessed a “failure to file” penalty. When you don’t deposit the money within three days, you’re assessed a “failure to deposit” penalty and a “failure to pay” penalty. If you haven’t paid your payroll taxes 16 days after they were due, you now owe an additional 33 percent of your tax bill in penalties, but that’s just the beginning.
You can very easily double your tax bill with cascading penalties. Suppose you:
- Missed a $5,000 deposit for Week 1
- You make the Week 2 and Week 3 payments on time.
First, you’re assessed penalties for Week 1. When you pay Week 2, it’s applied to the Week 1 shortfall and then you’re assessed penalties for Week 2.
The same thing happens with Week 3 and your penalties cascade until you make up the past-due amount.
Try to put you in jail.
It’s a federal crime not to pay your payroll taxes. It’s also a federal crime to borrow money from the trust and spend it on general business expenses.
The IRS can send your case to its criminal investigations division and to the Justice Department for criminal prosecution, particularly if it believes you willfully and knowingly violated the law. You can be liable for fines and you can go to prison.
Seize your personal assets.
You’ve probably protected your personal assets from claims made against the company through a limited liability company, a limited partnership, a corporation or another organizational structure. Guess what?
There is no liability protection from the IRS. You’re personally responsible for the payroll taxes your company owes, and the IRS can seize your personal assets to collect them.
If you have a second signer on your payroll checks, they’re also personally responsible for the delinquent taxes and the IRS can seize their personal property as well.
If you fall behind on your payroll taxes, seek advice from experts who know the law, are familiar with the IRS’s collections tactics and know the right options you should pursue.
For example, an installment agreement is usually preferable to an offer in compromise, because the IRS rejects most offers in compromise.
Tax laws and tax rules are constantly being updated and interpreted. This article contains general information, so please discuss your individual situation with a trusted tax adviser before making tax decisions.