Your Business Has a Tax Problem. Here’s How to Fix It.
Business tax issues move faster and hit harder than personal tax problems. The IRS treats unpaid payroll taxes as a priority, can hold owners personally liable, and has enforcement tools that can shut down operations. Understanding what you’re dealing with is the first step toward resolving it.
The Most Common Business Tax Problems
Business tax issues come in several forms, and many owners are dealing with more than one at the same time. Each type carries different penalties, different enforcement timelines, and different resolution paths.
Unpaid Payroll Taxes
This is the IRS’s highest collection priority for businesses. When you withhold income tax, Social Security, and Medicare from employee paychecks, that money is held in trust for the government. Failing to deposit it is treated more seriously than almost any other tax issue. The IRS can and does assess the Trust Fund Recovery Penalty (TFRP), which makes individual owners, officers, and even bookkeepers personally liable for the full amount of unpaid trust fund taxes.
The penalty is 100% of the unpaid trust fund portion. If your business failed to remit $50,000 in withheld employee taxes, the IRS can assess a $50,000 penalty against you personally, on top of the original business liability. Interest accrues on both.
Unfiled or Late Business Returns
Whether it’s Form 941 (quarterly payroll), Form 1120 or 1120S (corporate income), or Form 1065 (partnership), late or missing returns trigger penalties immediately. The failure to file penalty for income tax returns is 5% per month up to 25%. For payroll returns, failure to deposit penalties range from 2% to 15% of the unpaid amount depending on how late you are.
If you haven’t filed, the IRS can prepare Substitute for Returns without your deductions or credits, creating inflated balances. Partnership and S corp returns carry their own penalties: $235 per partner/shareholder per month late (2024), up to 12 months.
Back Business Income Taxes
Corporate income tax, S corp pass through liability, or sole proprietor Schedule C balances that weren’t paid in full. These carry the same failure to pay penalties (0.5%/month up to 25%) and interest (currently 7% compounded daily) as individual tax debt, but with the added complexity of business deductions, depreciation, and entity structure.
Worker Classification Issues
Treating employees as independent contractors (1099 vs. W-2) is one of the most common audit triggers for businesses. If the IRS reclassifies your contractors as employees, you can owe back payroll taxes, penalties, and interest for every quarter they worked. Section 530 relief may apply if you had a reasonable basis for the classification, but the burden of proof is on you.
Why Payroll Tax Debt Is Different
Most business debts stay with the business. Payroll tax debt follows you personally. When your business withholds income tax, Social Security, and Medicare from employee paychecks, that money belongs to the government from the moment it’s withheld. The IRS calls these “trust fund taxes” because you’re holding them in trust. Failing to hand them over is treated more seriously than almost any other tax obligation.
The Trust Fund Recovery Penalty (TFRP) is what makes this personal. It’s assessed at 100% of the unpaid trust fund portion, and it’s assessed against individuals, not just the business. If your business failed to remit $50,000 in withheld employee taxes, the IRS can assess a $50,000 penalty against you personally, on top of the original business liability.
How the IRS Enforces Business Tax Debt
Business tax enforcement moves faster than personal tax enforcement. The IRS treats payroll tax noncompliance as a priority because it involves money that was withheld from employees and belongs to the government.
| Timeline | What Happens | What It Means |
|---|---|---|
| Immediately | Failure to deposit penalties assessed | 2% to 15% penalty on the amount not deposited, depending on how many days late. Interest begins accruing. |
| 30 to 60 Days | IRS notices begin (CP504, LT11) | Demand for payment. These notices are the start of the collection process and give you rights to request a hearing. |
| 60 to 120 Days | Revenue Officer assigned | For larger payroll tax cases, a field Revenue Officer takes over. They can visit your business, request financial documents, and set deadlines. |
| 90 to 180 Days | TFRP investigation begins | Form 4180 interviews with potentially responsible individuals. The IRS is building a case for personal liability. |
| 120+ Days | Federal tax lien filed | Public record. Attaches to all business and personal property. Affects credit, ability to borrow, and ability to sell assets. |
| 180+ Days | Levies and seizure | Bank accounts frozen, accounts receivable seized, business assets seized and sold. IRS can levy both business and personal accounts. |
Timelines are approximate and based on typical IRS collection patterns. Payroll tax cases often move faster than these estimates, particularly when the business continues operating with ongoing noncompliance.
Resolution Options for Business Tax Debt
The IRS offers several paths to resolve business tax debt. The right option depends on whether the business is still operating, how much you owe, and whether payroll taxes are involved.
Installment Agreement
Monthly payment plans for businesses that can pay their full balance over time. Unlike individual streamlined agreements, business installment agreements almost always require financial disclosure. The IRS will want to see that the business can stay current on all new tax obligations while making payments on the old balance.
For payroll tax debt, the IRS typically requires all current deposits to be made on time as a condition of the agreement.
Partial Payment Installment Agreement
Monthly payments based on what the business or individual can actually afford. The unpaid remainder is written off when the 10 year collection statute expires. The IRS reviews your finances every two years and can increase payments if revenue improves.
Offer in Compromise
Available for both the business entity and individuals assessed with the TFRP. The IRS evaluates your reasonable collection potential: assets plus projected future income. Business OICs are more complex because the IRS evaluates the business as a going concern, including its receivables, inventory, and equipment.
Business OICs have a lower acceptance rate than individual OICs (roughly 24% vs. 44% historically). The IRS is more skeptical when a business that generated the debt is still operating.
Currently Not Collectible
If neither the business nor the responsible individuals can afford to pay, the IRS can suspend collection. The 10 year statute keeps running. Available for both the business liability and personal TFRP assessments, though the IRS evaluates each separately.
Penalty Abatement
First Time Abatement is available for businesses with a clean compliance history. Reasonable cause abatement applies for situations like natural disasters, serious illness of the business owner, or reliance on a third party payroll provider that failed to make deposits.
TFRP Defense
If you’ve received Letter 1153 (proposed TFRP assessment), you have 60 days to appeal. The defense focuses on two questions: Were you actually a responsible person? And was your failure to pay willful? If you can demonstrate you lacked authority over financial decisions, or that you were genuinely unaware of the unpaid taxes, the penalty may be removed or reduced.
What Makes Business Tax Cases More Complex
Business tax problems rarely come in isolation. These situations increase the difficulty and stakes of resolution.
Each quarter is a separate liability with its own penalties and interest. If the business has several quarters of unpaid 941 taxes, the total can escalate quickly. The IRS treats each quarter independently, which complicates resolution planning.
The IRS can assess the TFRP against every responsible person individually. If there are multiple owners, officers, or managers, each may face separate personal liability. The IRS collects the total amount only once, but it can pursue all of them simultaneously until the debt is satisfied.
If the business entity no longer operates, the IRS shifts enforcement entirely to the responsible persons through the TFRP. There is no business to negotiate with, so all collection activity focuses on personal assets, bank accounts, and wages.
The IRS requires filing compliance before accepting any resolution. If the business has multiple years of unfiled 941s, 940s, or income tax returns, those must be prepared and filed before the IRS will negotiate. Balances often change significantly once actual returns replace IRS estimates.
Many business owners have both personal income tax debt and business tax liabilities. The IRS evaluates these separately, and resolution strategies need to account for both. An installment agreement for the business doesn’t resolve your personal TFRP assessment or individual tax debt.
Once a Revenue Officer is assigned to your case, timelines compress. They set deadlines, request documents, and can recommend liens, levies, or business closure. Having representation at this stage is critical. Revenue Officers are trained investigators and everything you say can affect the outcome.
What Happens If You Don’t Resolve It
The IRS has every tool available for personal tax debt, plus additional tools specific to businesses. They can seize accounts receivable, freeze business bank accounts, contact your customers directly to redirect payments, seize business equipment and inventory, and in the most serious cases, padlock the business. For payroll tax cases, the IRS can also file a Notice of Federal Tax Lien that appears on both the business and personal credit records of responsible individuals.
Passport revocation applies to responsible individuals with seriously delinquent tax debt over $62,000, which includes personal TFRP assessments.
Read more about IRS collections and enforcement here.
How We Approach Business Tax Problems
Business tax cases require a different approach than personal tax resolution. The stakes are higher, the timelines are shorter, and the IRS is more aggressive. Here’s how we work through it.
Assess the Full Picture
We pull transcripts for all business entities and all potentially responsible individuals. We identify every liability, every quarter, and every assessment. If the IRS has proposed a TFRP, we review the basis for their determination. If substitute returns were filed, we identify where the liability can be reduced by filing actual returns.
Get the Business Current
Before the IRS will negotiate, the business must be in compliance. That means all returns filed and all current tax deposits being made on time. If there are unfiled returns, we prepare them. If the business can’t stay current going forward, that changes the strategy entirely. The IRS won’t put a business on a payment plan for old debt if it’s still falling behind on new obligations.
Defend Against the TFRP
If the IRS is pursuing personal liability through the Trust Fund Recovery Penalty, we evaluate your defense. Were you actually a responsible person under the law? Was your failure willful? If the facts support it, we file a protest and take the case to IRS Appeals. If the assessment is appropriate, we shift to negotiating the best resolution for the personal liability.
Negotiate Separate Resolutions
Business tax debt and personal TFRP liability are separate cases that require separate resolution strategies. We negotiate each one based on the financial circumstances of the business entity and the individual. This often means an installment agreement for the business and a different arrangement for the personal liability, whether that’s a payment plan, an offer in compromise, or currently not collectible status.
Protect the Business Going Forward
We help establish systems to prevent future compliance issues: proper payroll deposit schedules, estimated tax planning, and filing calendar management. If a third party payroll provider was part of the original problem, we help evaluate alternatives. The goal is a clean path forward that keeps both the business and the individual out of trouble with the IRS.
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