Unpaid employment tax liabilities results in the highest level of IRS enforcement. The IRS usually assigns its most experienced Revenue Officers to investigate employment tax cases, including pursuing the individuals in the business personally for not paying their employees taxes.
If your business owes employment taxes to the IRS, what does this mean to you and where does it lead?
Let’s break it down – 10 tips on what to expect from the IRS, and how to handle the IRS scrutiny.
1. Yes, the IRS will make an unannounced first visit to your business. Be respectful and courteous. This the Revenue Officer’s first impression of you – make it count. Build credibility and confidence with the Revenue Officer. You do not have to make any promises or statements, but be sincere. Tomfoolery will get you nowhere.
2. You do not need to offer explanations, talk at length, provide documents or financial statements at the first visit. Expect open-ended questions. You can tell the Revenue Officer you will be getting professional assistance to solve your problem, and your representative will contact him, and respond to questions and provide all requested information.
4. You do not have to let the Revenue Officer past a lobby area or into the business. There is no right to tour your business or view your assets to see what you have unless (1) you voluntarily agree or (2) the Revenue Officer has a court ordered writ of entry permitting him to take a walk-through (it would be rare for a RO to have a writ of entry on a first visit).
5. The IRS cannot take your bank accounts and customer receivables until 30 days after a Final Notice of Intent to Levy is issued. In many cases, the Revenue Officer will hand-deliver the Final Notice during the first visit. This notice is important – it gives you important appeal rights to resolve your case without the threat of levy with an IRS settlement officer instead of an enforcement officer.
6. The Revenue Officer wants to set deadlines and move the case forward. He will want unfiled returns, an IRS financial statement (Form 433B), and proof that you can make your employment tax deposits and stop the problem. He will send you Form 9297, Summary of Taxpayer Contact listing what he wants and when.
7. Revenue Officer deadlines are dead serious – miss them and risk levy action or an IRS summons compelling your cooperation. If you cannot make a deadline, it is important to let the Revenue Officer know in advance, not at the last minute, to ask for an extension in good faith.
8. As you have been pyramiding employment taxes, Job #1 is to stop the bleeding. Immediate procedures have to be put in place to find the money to make the deposits.
9. Expect the Revenue Officer to start an investigation of the business for the trust fund recovery penalty. The IRS is looking for those in the business who were part of the decision not to pay the withholding taxes to the IRS. The Revenue Officer will want to interview people in the business to see what they know, and subpoena bank records to see who signed checks (directed payment of bills). The interview presents its own set of issues to deal with, including whether to submit to it all and if so, knowing the questions to be asked ahead of time.
10. The IRS tends to cast a wide net when pursing the trust fund recovery penalty against business owners. You have appeal rights to dispute if you disagree. Until appeal rights are exhausted, the IRS cannot collect the trust fund taxes from you personally. But you may be asked for a personal financial statement (Form 433A). But remember at the investigation stage, you do not personally owe the IRS anything yet, so consideration should be given to deferring.
Employment tax liabilities involve multiple defenses (business, individuals) and many twists and turns. Knowing what is coming and being prepared helps plan for successful resolution.