Few issues cause more fear for small business owners than payroll tax problems. The IRS treats unpaid employment taxes as one of the most serious violations because these funds include your employees’ withheld income and Social Security contributions.
When a business falls behind on Form 941 (quarterly) or Form 940 (annual FUTA) payments, penalties can accumulate rapidly — and owners, officers, or even bookkeepers may become personally liable for the unpaid taxes.
What Are Payroll Taxes — and Why They Matter?
Payroll taxes are the employment-related withholdings businesses are required to collect and remit to the IRS on behalf of their employees. They include:
- Federal income tax withholding
- Social Security and Medicare (FICA)
- Federal Unemployment Tax (FUTA)
When a business withholds federal income, Social Security, and Medicare taxes from employees’ paychecks but fails to pay them to the IRS, it is considered a misappropriation of trust funds. These withheld taxes are legally the property of the government and are held in trust by the employer.
💡 Pro Tip: Payroll taxes are not dischargeable in bankruptcy — and the IRS can collect them directly from responsible individuals under IRC §6672.
How Payroll Tax Problems Start?
Most small businesses don’t set out to evade payroll taxes. Problems typically start with cash flow issues, bookkeeping mistakes, mismanagement of funds, a lack of understanding of complex tax regulations, or third-party payroll errors.
📘 Reference: Publication 15 — Employer’s Tax Guide
What the IRS Does When Payroll Taxes Go Unpaid?
When payroll taxes are missing, the IRS follows a strict enforcement sequence:
| Stages | IRS Action | Result |
|---|---|---|
| Notice & Demand | CP220 / CP504 | The IRS notifies you of unpaid Form 941 or 940 taxes and demands payment. Failure to pay triggers enforced collection. |
| Revenue Officer Assigned | In-person or phone contact | A field Revenue Officer begins investigating the delinquency and may request financial records. |
| Trust Fund Recovery Penalty (TFRP) Investigation | Form 4180 Interview | The IRS identifies responsible persons (officers, owners, signatories) who willfully failed to remit trust fund taxes. |
| Assessment & Enforcement | Letter 1153 & Form 2751 | The IRS proposes and assesses the TFRP against individuals personally; signing Form 2751 accepts liability. |
| Collection Actions | Liens, Levies, Wage Garnishment, and Other Enforcement Actions | Beyond notices and penalties, the IRS can take aggressive measures to collect unpaid employment taxes. |
💡 Pro Tip: If you receive Letter 1153 or contact from a Revenue Officer, consult a tax attorney immediately — you may be personally liable under the Trust Fund Recovery Penalty (TFRP).
How to Resolve Payroll Tax Problems?
The IRS’s main goal is compliance — not to shut down your business. But resolution must happen before enforcement begins.
File Missing Payroll Tax Returns
Submit all unfiled Forms 941 and 940 immediately.
Pay Current Payroll Taxes
The IRS prioritizes ongoing compliance. Always stay current with new payroll deposits before addressing old debt.
Request a Payment Plan or Settlement
| Program | Best For | IRS Link |
|---|---|---|
| Installment Agreement | Businesses that can pay over time | Payment Plans — IRS |
| Offer in Compromise (OIC) | Businesses unable to pay full balance | Offer in Compromise — IRS |
| Currently Not Collectible (CNC) | Hardship or business closure | Currently Not Collectible |
Respond to All IRS Correspondence
Never ignore letters from the IRS.
📘 Reference: Understanding Your IRS Notice or Letter
How a Tax Attorney Protects You and Your Business?
A Tax Attorney can protect you and your business.
| Attorney Service | Purpose | Impact |
|---|---|---|
| IRS Revenue Officer Negotiation | Communicates directly to pause enforcement | Prevents levies and asset seizures |
| Trust Fund Defense | Challenges personal liability findings | Protects owners and officers |
| Penalty Abatement Filings | Requests relief for reasonable cause | Reduces financial burden |
| Installment / OIC Negotiation | Restructures debt to affordable levels | Keeps business operational |
| Lien and Levy Releases | Removes active collection actions | Restores cash flow and credit |
| Compliance Strategy Planning | Ensures future payroll compliance | Prevents recurrence |
💡 Pro Tip: Once your tax attorney submits Form 2848 (Power of Attorney), the IRS must stop contacting you directly — communication flows through your legal representative.
📘 Reference: Form 2848 – Power of Attorney
Need help with a similar issue? Contact our firm today for a consultation.
Payroll tax problems can escalate faster than any other IRS issue — turning a small cash shortfall into a personal liability. The key to protecting your business and yourself is taking action early — before the IRS assigns a Revenue Officer or files liens.
If you’ve missed payroll deposits, received IRS notices, or been contacted about a Trust Fund Recovery Penalty, contact Pelham PLLC today. Our tax attorneys will stop enforcement, negotiate your liability, and guide your business back into full compliance — safely and legally.
FAQs
What if my payroll company failed to pay the IRS?
You’re still liable. The IRS holds the business — not the payroll company — responsible for unpaid employment taxes.
Can the IRS take my personal assets for payroll taxes?
Yes. Through the Trust Fund Recovery Penalty, the IRS can pursue your bank accounts, wages, or property personally.
What if I can’t afford to pay?
Programs like OIC or CNC allow qualified businesses or owners to reduce or suspend payments.
Should I hire a tax attorney?
Yes — if there are multiple missing quarters, notices, or personal exposure. Attorneys provide both defense and negotiation leverage.
