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My business has unpaid IRS employment taxes. What will happen?

During my many years of practicing IRS tax law, I’ve representing countless businesses, business owners and employees regarding a business’s failure to pay its employment taxes. The collection of unpaid employment taxes is undoubtedly one of the most aggressively enforced areas of tax compliance by the IRS. IRS Revenue Officers assigned these types of cases are very aggressive and try to find as many people as possible to hold liable for the trust fund recovery penalty.

If your business owes unpaid IRS employment taxes, then you should know:

1. The IRS Revenue Officer will make a surprise visit to your business. Unannounced visits by IRS Revenue Officers assigned to unpaid employment tax cases are very common. In fact, these surprised visits have occurred in every case I’ve ever been involved with and can understandably have a very unnerving effect if you aren’t prepared. So, if you have unpaid IRS employment taxes, you should know the following in preparation for the inevitable visit by an IRS Revenue Officer:

Keep it professional. Professionalism goes a long way. This is your first opportunity to make a positive and lasting impression on the IRS Revenue Officer. Treat him or her with professionalism and kindness. Your goal is to appear credible and trustworthy.

Don’t make promises or offer explanations. Remember, this is an unannounced visit by the IRS Revenue Officer. You are not under any legal obligation to make promises or spend any more time than is necessary to greet him or her. Also, you are under no legal obligation to provide the IRS Revenue Officer any financial statements or documents during this visit. In fact, it is fine to truthfully explain that you are very busy and that you wish you knew he or she was stopping by. If so, you would have scheduled more time to meet. At this point, you should tell the IRS Revenue Officer that you will contact a tax attorney to help resolve this matter, and that your tax attorney will contact him or her, and provide everything necessary to satisfy their requests.

Don’t allow this unscheduled visit by an IRS Revenue Officer disrupt your business operations. Very few things will disrupt your day-to-day business operations more than having an IRS Revenue Officer introduce himself or herself by flashing their official credentials, and then convincing you to walk him or her around your facility. Employee gossip will spread like wildfire and these rumors are never to your advantage. Therefore, it is important to know that the IRS Revenue Officer has no legal right to tour your business or view your assets without your (1) voluntary consent, or (2) has with him or her a court ordered Writ of Entry permitting entry into your facility. (Court ordered Writs of Entry are rarely ever used by IRS Revenue Officers during their first visit.) Without being presented a Writ of Entry, it is absolutely fine to truthfully explain to the IRS Revenue Officer that your business operations are very busy, and that your tax professional will discuss with him or her arranging a walk through in the future. Absent a Writ of Entry, there is no reason to allow the IRS Revenue Officer entry past your reception area.

2. Your bank accounts and accounts receivable cannot be seized (levied) until 30 days after you’ve been sent an IRS Notice CP 297, Final Notice of Intent to Levy and Notice of Your Right to a Hearing. Many times, the IRS Revenue Officer will personally deliver the IRS Notice CP 297 to you when he or she makes their unannounced visit. The IRS Notice CP 297 is a VERY SERIOUS notice. DO NOT IGNORE IT! If you fail to take appropriate action within 30 days, the IRS Revenue Officer will have the legal authority to seize (levy) your business property, bank accounts, and other assets.

3. IRS Revenue Officers are very busy people. Make no mistake about it, while IRS Revenue Officers are very sophisticated IRS employees, they are also usually overworked and manage numerous IRS tax cases simultaneously. So, the good news is that your case is not their only priority. The bad news is that your case is not their only priority. What does this mean? It means that you must be accurate, timely and precise in all your dealing with these busy people. Failure to handle yourself this way can overly complicate resolving your IRS employment tax case, unnecessarily prolong finalizing your IRS tax case, as well as even adversely affect your case’s overall outcome. Therefore, every IRS Revenue Officer sets deadlines in order to move your case forward and they should be taken very seriously. Missing deadlines can result in levy actions and/or official summons demanding your cooperation. At a minimum, the IRS Revenue Officer will require:

all of your business’s unfiled IRS tax returns are filed so it is in full filing compliance (this includes, but is not limited to, IRS Forms 941 and 940);

an accurate IRS Form 433-B, Collection Information Statement for Statement, is submitted; and

proof that you can make your IRS employment tax deposits on an on-going basis.

After the IRS Revenue Officer’s visit is concluded, he or she will provide you an IRS Form 9297, Summary of Taxpayer Contact, detailing the items you must provide and their corresponding deadlines.

4. You must immediately and timely begin paying all your IRS employment taxes. Once you are in the crosshairs of an IRS Revenue Officer for not paying your IRS employment taxes, there will be very little tolerance for your business continuing to not timely pay them in full. Failing to do so, puts your business as real risk of being shut down by the IRS.

5. The IRS Revenue Officer will begin a trust fund recovery penalty case. Arguably, this is one of the most unfair personal tax liability determination processes involving the IRS. During this investigative process, the IRS Revenue Officer will try to justify his or her determination that as many people as possible are personally liable for paying the trust fund portion of the business’s unpaid employment taxes. I have been involved in IRS trust fund recovery penalty investigations in which the IRS Revenue Officer assigned to the case indiscriminately went after all owners, directors, officers, and even employees (salaried and hourly), trying their hardest to justify deciding as many people as possible are personally liable for paying the trust fund portion of the business’s unpaid employment taxes.

The IRS casts a very wide and unfair net in trust fund recovery penalty investigations. Theoretically, in these investigations the IRS Revenue Officer is only supposed to focus on those individuals in the business who were responsible for paying the IRS employment taxes and willfully decided not to pay them. Unfortunately, this is not always the case and innocent people are frequently wrongfully determined to be liable for paying the trust fund recovery penalty. As part of the investigatory process, the IRS Revenue Officer will want to conduct personal interviews of everyone, as well as subpoena the business’s bank records to determine who signed the business’s checks. These interviews can be very complicated and their outcomes are extremely important. No one should undergo a trust fund recovery penalty interview without first seeking guidance from a knowledgeable tax attorney. In the event the IRS Revenue Officer determines you are personally responsible for paying the trust fund recovery penalty, you will have the right to appeal this determination within 60 days (75 days if the letter is addressed to you outside the United States) after the issuance of the IRS Letter 1153(DO) and IRS Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, which state the IRS plans to assess the trust fund recovery penalty against you. Until your appeal rights are exhausted, the IRS cannot collect the trust fund recovery penalty from you personally.