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Resolving a $100,000 Payroll Tax Debt Amid an S-Corp Filing Error

The Problem

The company owed over $100,000 in payroll back taxes. Complicating matters further, the owners had been paid through regular payroll despite their S Corporation election never having been approved by the IRS. The IRS also claimed the business was missing four years of tax returns — even though those returns had, in fact, been filed by the previous CPA. On top of that, the owners had personal income-producing assets that the IRS wanted them to sell to help pay off the debt.

The Challenges

  • Overcoming the lack of official S Corporation status by submitting a backdated S election application
  • Proving previously filed tax returns and negotiating over $100,000 in payroll back taxes
  • Negotiating with the IRS to avoid the owners having to sell personal assets to cover the tax debt
  • Securing an installment agreement without triggering a trust fund penalty or forced asset sales
  • Petitioning for penalty abatement due to the previous CPA's misguidance

Our Approach

Since the business had already been paying the owners on payroll for 2.5 years, correcting the original filing status would have required amending 2.5 years of payroll returns. Instead, we applied for late S election relief dating back to the original intended S election date. Once that was granted, we filed the two outstanding S Corporation tax returns.

To secure an installment agreement, we requested that an IRS revenue officer be assigned to the case, then worked quickly to submit all requested documentation as soon as the officer was assigned. We informed the revenue officer that the "missing" partnership returns had actually been filed on a Schedule C with the owners' personal tax return, and the officer agreed to strike that requirement from the record. We then negotiated an installment agreement in which the business would pay off the tax debt at under $1,750/month, and requested penalty abatement on the grounds that the business owners had been misguided by their previous CPA.

The Outcome

  • Successfully backdated the S Corporation election, avoiding the need to amend years of prior payroll returns
  • Secured an installment agreement for a manageable $1,750/month payment plan, preventing asset liquidation
  • Secured $20,000 in penalty abatement due to the previous CPA's misguidance