What Is the Statute of Limitation on Payroll Tax for a Corporation?
When a corporation owes payroll tax, the IRS only has a certain amount of time to legally collect what is owed from the company. This time period is called the collection statute. Although the IRS only has a certain amount of time to collect, some businesses may not be able to fiscally afford to pay back the taxes within the statute period. When this happens, a company is typically allowed to stay in business as long as it makes regular payments on the debt. After the statute expires, any remaining debt is essentially written off as uncollectible by the IRS.
When a company has been assessed with delinquent payroll taxes, the IRS has 10 years to collect what is owed under the collection statute. The standard expiration date of the statute is 10 years from the date the return is filed showing the balance, or 10 years from the date the IRS files a return on behalf of the company, which can occur if the business fails to file a return on its own. The IRS uses the most recent of these events to calculate the expiration date of the statute, so if the IRS files a return on behalf of the company and the company later files its own return showing a balance, the collection statute starts over as of the date of the company-filed return.
The 10-year collection statute is the standard period in which the IRS must collect, but certain events may create an extension on this time period. A company may request an appeal of IRS actions, or file a request for an Offer in Compromise to settle any business debts owed. Under these two examples, the IRS can't legally try to collect any of the company's past-due taxes. Because the IRS can't collect during the periods when these actions are processing, it adds the time it takes to process the requests on to the regular statute. General appeals typically extend the statute only by a few months, but an Offer in Compromise request could extend the collection statute by up to a couple of years. If a debt is not settled through the program, then the IRS has extra time to collect from the business.
A portion of a company's payroll tax liability may be comprised of "trust fund" tax. Trust fund taxes are those that are withheld from employees, but not remitted to the IRS, such as income withholding taxes and the employee-paid portion of Social Security and Medicare taxes. When a business accrues payroll debt, the IRS may seek collection of the trust fund portion from the individuals responsible for not paying the trust fund tax. In many cases, the individuals responsible include the owners of the company, but may also include employees who handle payroll, bank and tax deposit transactions. If trust fund recovery penalty assessments are made, the business still has an opportunity to pay the tax back instead of the individuals. As long as the business does this, it is not typical for the IRS to actively seek collection of the tax from assessed individuals.
Individual owners or employees of corporations may also be personally assessed with the trust fund recovery penalty. However, the IRS only has three years from the date trust fund taxes accrue to make an assessment against individual owners or employees. After three years, the assessment statute expires and the IRS may not legally seek collection of any trust fund taxes from the individuals responsible for the tax. If an individual owner is assessed with the trust fund tax, the same 10-year standard collection period applies, beginning with the date a return is filed showing a balance due, and extended for any periods in which in the corporation requests an appeal or other action prohibiting the IRS from collecting the tax.