IRS Letter 5857 indicates that the IRS is watching you to determine your compliance with deposit requirements. Ignoring this letter and other IRS notices could worsen your tax situation, leading to even heavier penalties and personal liability.
While every tax issue is alarming, finding out that you’re behind on your payroll tax deposits is incredibly overwhelming for business owners. The penalties associated with late payroll tax deposits can be financially devastating to a new business, and getting caught up after falling behind is incredibly challenging.
If you’ve received IRS Letter 5857 and you’re not sure what to do next, it’s time to call Wiggam Law. Call us at (404) 233-9800 to set up a time to meet with our team and discuss your tax issues in greater detail.
Key Takeaways:
- The IRS sends IRS Letter 5857 to set up a phone call with businesses that are behind on payroll tax deposits.
- Their goal is to catch issues and solve them early to prevent the debt from becoming so large that the employer cannot resolve it.
- You may be able to set up an installment agreement or otherwise come to an agreement that allows you to catch up.
- Ignoring this notice may result in liens, levies, or the Trust Fund Recovery Penalty.
- Wiggam Law can help you find solutions to this and other employer tax concerns.
Understanding IRS Letter 5857
IRS Letter 5857 is a notice that the IRS sends to businesses that have fallen out of compliance with payroll tax deposit requirements. It’s part of the Federal Tax Deposit Alert Program, which identifies unusual habits in a company’s tax deposits. By catching these issues early, the IRS hopes to address employment tax issues proactively and keep them from compounding until a taxpayer is unable to catch up.
As part of the FTD Alert Program, the IRS makes direct contact with taxpayers to address issues, provide guidance, and help taxpayers get back on track. Rather than making an unannounced visit or phone call, the IRS sends Letter 5857 to schedule a phone call to discuss their concerns.
Who Receives IRS Letter 5857?
Businesses that have missed payroll tax deposits, have started making deposits late, or have made only partial deposits may receive IRS Letter 5857 once the FTD Alert Program flags them.
IRS Letter 5857 vs. 725-B
Letter 5857 isn’t the only one the IRS uses to initiate direct contact with taxpayers. They also use Letter 725-B. While they send Letter 5857 to schedule a phone call about your missed payroll tax deposits, they send Letter 725-B when they want you to schedule an in-person meeting with a revenue officer.
An in-person meeting is significantly more serious than a phone call, so receiving IRS Letter 725-B indicates that the severity of your tax issues has increased. The IRS may escalate your case if you ignore Letter 5857, do not take steps to resolve your payroll tax deposit issues, or otherwise improve your compliance.
Why You May Have Received IRS Letter 5857
While we’ve discussed the general reason that the IRS sends this letter, there are numerous issues that may have brought you to this point. You’ve either missed payroll tax deposits, deposited partial payments, or regularly paid late—but why?
Many business owners who find themselves in this position are struggling with limited cash flow. It’s common for new or small businesses to hit rough patches due to a decline in clientele, fluctuations in the economy, or an increase in expenses. However, there’s an issue when businesses then use their payroll tax deposits to tide themselves over during rough periods.
This is often a sign that a business’s financial struggles are serious enough that permanent closure may be in the near future. By addressing this issue early, the IRS can improve tax compliance and hopefully help businesses avoid closing due to lack of funds.
You may also have a pattern of non-compliance with payroll tax obligations. The IRS’s automated system tracks issues like this and determines when a phone call is necessary. If you’ve made a certain number of late deposits in the recent past, made partial deposits instead of one on-time deposit, or entirely skipped deposits, that’s an issue. This may be an administrative error; when a business grows, it’s common for financial and human resources issues to fall further and further down on the to-do list.
If you’ve had errors or inconsistencies in your federal tax deposits, that’s another reason the IRS may reach out to you. For example, dramatic differences in the amounts of your deposits, adherence to a random deposit schedule instead of the deposit schedule you’re required to follow, or incorrectly made deposits can all lead to an IRS phone call.
What to Expect When the IRS Calls
No one looks forward to talking to the IRS, so if you’re feeling nervous about your phone call, know that you’re not alone. However, knowing what to expect and what the potential outcomes of the phone call are can help you feel less anxious. It is important to note that the IRS can bring criminal charges for not collecting and paying payroll taxes. Therefore, consulting with an attorney before speaking with the IRS is advisable.
The agent assigned to your call will describe the issues they’ve noticed and ask you about any missed late or partial payroll tax deposits. This is your chance to explain what happened or, if necessary, explain where their records are wrong. For example, if you have proof that you made all necessary deposits in full and on time, you can provide that evidence now.
The agent may also ask for access to your financial records. By looking over your records, they may be able to determine where you fell out of compliance and how you can get back on track.
There’s a good chance that the agent will bring up the Trust Fund Recovery Penalty, as this is one of the more serious outcomes of missed payroll tax deposits. When a business consistently refuses to deposit payroll taxes, the IRS may identify one or more responsible persons to hold accountable for those missed payments. That person is then charged the TFRP, which equals 100% of the late, unpaid, or underpaid trust fund taxes.
The TRFP is only based on the portion of taxes withheld from the employees’ paychecks. It does not include the employer’s matching portion of these taxes.
Depending on your financial situation and what the phone call reveals to the IRS agent, they may ask you to set up an installment agreement or some other payment arrangement that allows you to get caught up. Remember, their first goal is to get paid—even if that is a struggle on your end.
Going into an IRS call unprepared can lead to unintentional admissions or disclosures that can land you in serious legal trouble with the agency. Consulting with a tax professional at Wiggam Law can help you protect your rights and avoid unintentional consequences associated with talking to the IRS.
Consequences of Ignoring IRS Letter 5857
By the time a business owner has landed on the IRS’ radar, they are often so overwhelmed with their tax concerns that tackling them head-on seems impossible. As a result, many people ignore IRS letters until a situation has become unavoidable. This is the wrong way to handle Letter 5857.
At this point, a real person is looking at your taxes and your payroll tax deposits—you’re no longer just part of the automated system. A revenue officer is trying to contact you and develop a payment plan.
If you ignore the letter, the IRS will continue to watch you more closely as they escalate their collection efforts. The revenue officer assigned to your case may look into liens and levies as a way to collect what you owe the IRS, which can further impede your business’s growth and efforts to catch up with missed deposits. The Revenue Officer may also make a criminal referral.
When the IRS sends Letter 5857, their goal is to make contact with the taxpayer within 25 days. If they are unsuccessful, they may switch the revenue officer assigned to your case. At that point, they may no longer want a phone meeting—they may send Letter 725-B, which requires an in-person meeting. The stakes are even higher at this point, which is why it’s important to take action early.
You also risk the Trust Fund Recovery Penalty being assessed if you do not cooperate with the IRS as they attempt to resolve your tax issues. Depending on how much you owe, that could be a huge financial hit—and it’s not one your business absorbs, it’s one you are personally liable for. If it remains unpaid, the IRS can initiate collection actions against you.
In extreme cases, you could even be the target of criminal tax fraud investigations. As a business owner, you know your payroll tax deposit obligations. At some point, the IRS may consider continued failure to make deposits criminal theft of money that is owed to them.
How to Respond to IRS Letter 5857
First, read the letter in its entirety. The IRS wants to work with you to get you caught up and compliant, and they provide information that can help you get there.
Once you know what the IRS is asking, you can start gathering your payroll tax records, records of your tax deposits, and any other relevant financial records. You want to know how far you are behind, what you owe, and if you’ve been charged penalties.
From there, you can develop a plan to address your tax situation. The IRS likes to see taxpayers be proactive about their issues, so having a basic plan may help you during your phone call.
Finally, set aside some time to talk to an attorney at Wiggam Law. What you say during your call with the IRS could unintentionally lead to further issues, and you want to protect yourself and your business.
Preventing Future Payroll Tax Issues
Getting caught up is just one part of your tax needs—you also want to get to a position where you no longer have to worry about ending up in the same position again.
You should start by meeting with a tax attorney or business CPA to help you understand your requirements regarding federal tax deposits. When you know your deposit schedule and what is legally required of you, you can prevent avoidable errors.
This is also a good opportunity to automate your payroll taxes as much as possible. In the early days of a business, business owners often do everything themselves to save money—but at a certain point, automation makes sense. This ensures that deposits are made on time and in full.
Consider working with a tax attorney or CPA to set yourself up for long-term tax success. Business taxes are complex and multifaceted, and when you meet with a tax pro regularly, you can catch errors early and stay compliant with all current and future IRS regulations.
When you receive IRS Letter 5857, you may have fallen behind on payroll tax deposits—but you have options. There are payment plan options and other solutions that can help you catch up. IRS Letter 5857 is a red flag indicating that you need to address your tax issues and come up with a new solution for your payroll tax deposits.
If you fail to resolve this issue now, you may face liens, levies, and the Trust Fund Recovery Penalty. Being proactive is key to handling this and other tax situations.
You don’t have to go through this alone—and in fact, having legal assistance can help you approach this situation with the care and planning it demands. The team at Wiggam Law specializes in assisting businesses to address payroll tax disputes before they escalate. Contact us today to set up a consultation and take control of your IRS tax situation. Call us at (404) 233-9800 or reach us online to set up a time to talk.