Well, when the IRS determines that a particular taxpayer is owing, they begin the hunt for collections. Now, which strategy they choose to use to collect those back taxes is dependent on the dollar amount and whether the taxpayer is a business or individual. The process for an individual who owes is much simpler, so we’ll start there. After a certain period of time of not paying down the debt, the taxpayer should expect to receive some notices of amounts due, intent to levy, and notices of intent to lien. Allow me to elaborate on what that means — so, let’s say you have a tax debt of 40,000 and you own a home, the IRS, after attempting to collect the debt for a certain period of time, may place a lien on the property and record it in the county. This is a problem as it will affect you when you try to sell your home. When there is a lien on a property, that property’s title is no longer a clear title. It is now what we call a cloud-on title and that must be cleared before the sale of a property. So, when you sell this home, a portion of your sale will automatically go to the IRS to clear that lien. Not to mention, if the entire sale doesn’t pay it off, now you have a deficiency that may attach to a subsequent property.
In regards to businesses, it’s a little bit more complicated. First, we need to know whether it is employment tax debt or another tax due. If it is a different type of tax debt other than employment tax debt, the process is very similar to that of an individual. The IRS will send out a handful of notices to give the business multiple opportunities to resolve the liability, and, if the business fails to do so, they may file a tax lien. Also, in the case of individuals and even businesses, after a certain period of time, the IRS has the ability to garnish funds from bank accounts and even freeze assets to cover the debts.
Now, employment tax debt is a little bit more interesting. To begin with, we need to have a clear understanding of what employment tax or payroll tax is. Payroll tax consists of three parts — withholding, social security, and Medicare. A lot of people don’t realize that when you’re dealing with employment taxes, there are two parts. There’s the employee part and then there’s the employer part. So, the employer is responsible for half of the social security and half of the Medicare tax. The other half is the responsibility of the employee along with the withholding. In other words, when an individual receives a paycheck, their withholdings along with their half of social security and Medicare are usually taken out by the employer. The employer holds onto the employee’s portion of taxes until it is time to send it to the IRS. When this time comes, the employer acts as an agent of the IRS and sends in the employee’s portion of the tax coupled with their half of the tax. If the entire employment tax is not sent, that is, neither the employer nor the employee portion of the tax is sent to the IRS after a certain period of time, the IRS will set out to acquire this debt. It will start by notifying the employer/taxpayer of the tax amount due. If the employer fails to pay the amount due (likely with interest and penalties that have accrued), the IRS would likely set up what is called a Trust Fund for the employee portion of the tax as well as continue the collections process and enforcement action to collect the amount due. There will be liens and there will be levies. However, the main difference here is the formation of this Trust Fund. The reason for the Trust Fund is to protect the employee as they are entitled to the social security and Medicare benefits that come from paying those taxes out of their paychecks. By not submitting those taxes that are being withdrawn from the employee’s paycheck, the employer, whether they know it or not, could be committing tax evasion in the eyes of the IRS. As an agent of the IRS, you’re supposed to send these taxes to them, and if you fail to do so, you could be held personally liable. When I say personally, I mean personally. A lot of people say, “Oh, I have a company so I’m protected from any personal liability,” but that is not always the case. In this particular situation, where a trust fund recovery has been formed to deal with the unpaid employee’s portion of the tax, the owners of the business can be held personally liable as per the IRS, which means you cannot hide behind the company for a limited liability protection. Even if the company goes under and can’t pay anymore, you, the owner, are still personally liable. This is why I cannot stress how imperative it is to try and work this out with the IRS if you are a business owner and find yourself in this situation.
In regards to solutions, usually the trust fund itself is not something that you can negotiate, but you can negotiate the other aspects of the unpaid tax with the IRS, and that reduced portion will be applied to the trust fund amounts. If you do not attempt negotiation for a structured resolution, you could be in a very precarious scenario where you’re going to have to pay this for the rest of your life.