IRS recently announced a new “initiative” (July 31, 2015 e-mail for tax professionals), to make early contact with employers who are falling behind in their payroll taxes. According to the announcement, when it appears an employer may owe a balance at the end of the quarter, Revenue Officers will be in contact before the quarterly payroll tax return, Form 941, is due. The stated goal is to address payroll tax issues before they become unmanageable. The announcement refers the reader to the Publication 15, the Employer’s Tax Guide, presumably for a discussion of tax deposit schedules.
This is a dubious move for the following reasons: It is true that because of the downturn in the economy many business have fallen behind in filing and paying employment taxes for multiple quarters, and even for several years. Some defaulting taxpayers have not been contacted by IRS for long periods, and have piled up large liabilities, a fact which may have prompted the announcement of the initiative. But it remains to be seen whether the new initiative will really be workable, and how effective it will be. For one thing, there is a question of how the IRS will fund its “intervention” initiative, because the problem it seeks to address is in no small part a product of its lack of funding for enforcement action in the first place. While better IRS automated notice capabilities may be a cost effective way to contact business owners, it is hard to see that it will be effective to contact businesses and warn them that they may face penalties and seizures leading to closure, etc., if they have not been making deposits – most businesses are in compliance when they have the funds and fall out of compliance when they lack funds, so the problem remains largely an economic one, not simply one of compliance. Finally, IRS normally lacks enforcement capabilities until taxes are overdue. So it is hard to see what pre filing warnings will accomplish.
Nonetheless, businesses receiving notices or calls from IRS as part of the new initiative should seek the assistance of competent tax counsel to discuss options for meeting business expenses, while at the same time not falling behind with tax deposits. It will also be helpful for business owners to inform themselves on the types of collection actions IRS can bring to bear should 941 taxes become overdue.