Behind on Payroll Taxes? What Business Owners Can Do Now

Key Takeaways

• Withheld payroll taxes are held in trust for the government, so the IRS can collect them from the people who control the money, not just the business.
• The Trust Fund Recovery Penalty equals the unpaid withheld income tax plus the employees' share of Social Security and Medicare.
• Who signs checks and decides which bills get paid matters more than your title.
• Letter 1153 starts a 60 day appeal window. Do not let it pass.
• Minnesota can also hold officers, managers, and bookkeepers personally liable for unpaid state withholding.

What to Do This Week If Your Business Is Behind on Payroll Taxes

1. Make this quarter's deposits on time. A business that keeps falling behind has fewer options.
2. Get the facts in writing. List which quarters are open, what was filed, and what deadlines are on your notices.
3. File missing Forms 941 accurately. Form 941 is due the last day of the month after each quarter ends. See About Form 941 and IRS Publication 15.
4. Stop paying other bills ahead of withheld taxes. The IRS treats that as a sign of willfulness.
5. Tell the IRS where your voluntary payments go. Payments without instructions go to the employer's share first.
6. Do not sit for a Form 4180 interview or sign Form 2751 alone. If you ask to talk to a representative, the interview pauses.
7. Mark every deadline. You get at least 30 days on a final notice of intent to levy and 60 days on Letter 1153.

Which of These Sounds Most Like Your Business?

Back payroll taxes come from different places, and each starting point needs a different first move. Tap the situation that fits to see how we approach it.

Who Is Personally on the Hook: The Trust Fund Recovery Penalty

Federal law says withheld taxes are a special fund in trust for the United States (IRC 7501). When that money does not reach the IRS, the agency can assess the business and also the people responsible for paying it (IRC 6672).

What counts as trust fund tax

Trust fund tax is the income tax you withhold from wages plus the employee share of Social Security and Medicare. The employer share is not part of the penalty. Our guide to payroll tax vs income tax explains the split, and the IRS covers it on its Trust Fund Recovery Penalty page.

Who is a responsible person

A responsible person has the duty and the power to direct collecting, accounting for, and paying the taxes. The IRS list includes officers, employees, partners, directors, shareholders, nonprofit board members, payroll service providers, and professional employer organizations. An employee who only pays bills as told, without choosing which creditors get paid, is not a responsible person.

What willful means

Willful means you knew or should have known the taxes were unpaid, and you disregarded the law or were plainly indifferent to it. No bad motive is needed. Paying other creditors first when the business cannot pay its employment taxes is a sign of willfulness.

The business does not have to close first

The IRS can assess the penalty while the business is still open. It applies when the unpaid trust fund taxes cannot be collected from the business right away.

More than one person can owe it

The IRS can assess each responsible person for the same unpaid taxes. A person who pays more than their share can recover the excess from the others, but only in a separate case.

How long the IRS has

The IRS usually has three years from April 15 of the year after the quarter, or from the filing date if later, to assess the penalty. If a return was never filed, there is no time limit, and a substitute return the IRS prepares does not start the clock (IRM 5.7.3).

See Where Your Personal Exposure May Be Coming From

The biggest question in most payroll tax cases is whether the IRS can hold you personally responsible. This tool walks through the same kinds of facts a revenue officer reviews in a Form 4180 interview. It is not legal advice, and nothing leaves your browser.

When a Revenue Officer Calls or Visits

Check who you are talking to

Revenue officers can call or show up at a business unannounced. A real IRS visitor shows two credentials, a pocket commission and an HSPD-12 card. IRS collection employees will not demand an immediate payment to anyone other than the U.S. Treasury (how to know it is really the IRS).

The Form 4180 interview

Form 4180 is the IRS record of your duties, your authority over the money, and what you knew. The IRS uses your answers to decide responsibility and willfulness. If you say you want to talk to a representative first, the interview pauses so you can. A revenue officer may also ask you to sign Form 2751 at the interview. Do not sign Form 2751 at the interview until you understand what it agrees to.

Letter 1153 and the 60 day appeal

Letter 1153 proposes the penalty and comes with Form 2751. You have 60 days from the date of the letter to appeal, or 75 days if it is addressed to you outside the United States. If you do nothing, the IRS assesses the penalty and can then file a lien or levy your personal assets. By law, the IRS has to send this notice at least 60 days before it demands payment (IRC 6672(b)). The IRS process is in IRM 5.7.4.

Payment Plans for Payroll Tax Debt

Business payment plans usually start with a call to the number on your IRS notice, and a revenue officer handles the plan once one is assigned. The IRS explains the basics on its payment plans page. For individual balances, see our page on IRS installment agreements.

Simple Payment Plan (Business Trust Fund)

The IRS calls this the Simple Payment Plan (Business Trust Fund). Its older name was In-Business Trust Fund Express. It fits a business that owes $25,000 or less, has filed every return, and can pay in full before the collection deadline. No financial statement is required. If it is granted within 120 days of the case being assigned to a revenue officer, the IRS does not have to make a penalty decision on the owners (IRM 5.14.5).

Larger balances: a business installment agreement

A larger balance usually needs a business financial statement, Form 433-B, Collection Information Statement for Businesses. Generally the IRS does not assess the personal penalty while the business keeps the terms of the plan. It can still assert the penalty, for example when the business has fallen behind before or the plan would run long.

Late deposit penalties

The IRS adds 2%, 5%, 10%, or 15% of a late deposit, depending on how late it is (IRS failure to deposit penalty). These penalties can be removed for reasonable cause. See our page on penalty relief.

Levies on Business Bank Accounts

The IRS must send written notice at least 30 days before it levies, along with your right to a Collection Due Process hearing (IRC 6331). That notice is often a final notice of intent to levy.

When a levy hits a business account, the bank holds the money for 21 days before sending it to the IRS (IRC 6332). If that has already happened, see frozen bank account help and our IRS levy help page.

Asking for the simple business plan in the same request as a levy release does not work. The IRS will not grant the Simple Payment Plan (Business Trust Fund) when the two are requested together.

After demand, unpaid tax is a lien on everything the business owns. Learn how a federal tax lien works.

Behind on Minnesota Withholding Tax Too?

Minnesota withholding is state income tax you take out of employee wages and deposit with the Minnesota Department of Revenue (Minnesota withholding tax).

Minnesota has its own personal liability law, Minn. Stat. 270C.56. Anyone with control over or responsibility for withholding and paying the tax can be liable. Revenue lists officers, managers, bookkeepers, and employees who write checks or decide what gets paid (Minnesota personal liability assessments).

If Revenue assesses you, you get an Order Assessing Personal Liability. You have 60 days to appeal to Revenue or the Minnesota Tax Court, and you can ask Revenue in writing for 30 more days. Revenue does not take collection action against you during the appeal period.

A business payment agreement starts by phone, email, or letter. Revenue may still file a lien while you pay and may ask for a business financial statement (Minnesota payment agreements).

A Minnesota bank levy holds funds for 10 days, and Revenue cannot stop a levy once it is issued (Minnesota bank levy). Revenue can also revoke a business license or offset state vendor payments. See our Minnesota levy page and our Minnesota Revenue help page.

Form REV184b, Business Power of Attorney, lets an agent represent the business with Minnesota Revenue (who can represent you).

Who Should Handle Your Payroll Tax Case

Enrolled Agents are authorized to practice before the IRS (31 CFR 10.3). That covers letters, calls, meetings, and hearings with a revenue officer or Appeals, under a Form 2848 you sign. Minnesota Revenue also accepts agents as business representatives on Form REV184b.

Our Enrolled Agents pull your transcripts, file what is missing, deal with the revenue officer, prepare you for the Form 4180 interview, protest a Letter 1153 when the facts support it, and set up payment plans with the IRS and Minnesota Revenue. The cases that come to our team tend to be the complicated ones, including revenue officer assignments and payroll tax issues. For how the credentials compare, see tax attorney vs Enrolled Agent vs CPA.

When you need an attorney

Some payroll cases are not only civil. Willfully failing to collect or pay over withheld tax is a federal felony under IRC 7202, and Minnesota makes knowingly failing to remit a tax a crime under Minn. Stat. 289A.63. IRS criminal investigators are federal law enforcement agents, and they may visit a business unannounced. If your payroll tax case involves possible criminal exposure, Tax Court, or other attorney work, our tax attorney, Matthew Wildes, JD, CPA, steps in.

A Useful Review Starts With the Right Facts

You do not need everything perfect before reaching out. The first goal is to identify what is filed, what is missing, what the agency is threatening, and who may be personally exposed. Mark what you already have so you walk in knowing where the gaps are.

Payroll Tax Questions Business Owners Ask