A small chiropractic clinic fell behind on its federal payroll taxes back in 2010, and by the time the dust settled, the business owed the IRS more than a decade of debt weighed down with a lien, threatened levies, and a balance that kept growing. The IRS also came after the clinic’s owner personally, assessing a trust fund recovery penalty against him for the same withheld payroll money. PFGTAX represented both the business and the owner for years, working through a lien, a stalled installment agreement, two rejected settlement offers, and ongoing payments, before the IRS finally accepted an Offer in Compromise on the business debt in the spring of 2024, two years after the owner’s personal penalty had already been closed out.

How it started

A chiropractic clinic organized as a corporation runs payroll like most small medical practices. It withholds payroll tax from paychecks and deposits that money with the IRS on schedule, then adds its own matching share of Social Security and Medicare tax. In the fall of 2010, the clinic missed those deposits during a rough payroll quarter, and once one quarter slips, the next one often slips too. Within about a year the IRS had filed a lien against the business, and the balance for that first quarter alone sat at just over 19000 dollars before interest and penalties began compounding on top of it.

Because payroll withholding is money held in trust for the government rather than the business’s own funds, the IRS does not stop at the company. It can also assess what is called a trust fund recovery penalty, a civil penalty that holds a specific responsible person personally liable for the same unpaid withholding. That is what happened to the clinic’s owner. The IRS opened a separate case against him individually for the same payroll quarters, so two cases were moving at once, one against the business and one against him.

The pressure from the IRS

Over the next several years the collection notices kept coming. The IRS sent notice of its intent to levy, filed a lien, and at different points placed the account into an installment agreement, then pulled it back out again when the business could not keep up with those payments on top of current tax deposits. For a stretch the account was flagged as currently not collectible, which paused active collection but did not resolve anything. Interest and penalties kept accruing the whole time, on both the business balance and the personal penalty against the owner.

What we did

PFGTAX filed powers of attorney for both the clinic and its owner so we could deal directly with the IRS on both fronts instead of them fielding calls from a revenue officer. On the personal side, we worked to bring down the trust fund recovery penalty as payments from the business were credited against the same underlying liability, showing the IRS that the debt was already being addressed and should not effectively be collected twice. That penalty was fully resolved in August 2022, when the remaining balance was written off and the federal tax lien against the owner was released.

On the business side, we prepared a full financial disclosure using the IRS collection information statement for companies and submitted a formal Offer in Compromise, an application to settle the tax debt for less than the full balance based on what the clinic could actually afford. The first offer, filed in 2020, was rejected. We refiled a second offer at the end of 2021 with updated financials and kept the required monthly payments moving the entire time that offer sat with the IRS, since the periodic payment option requires payments to continue while a decision is pending. That second offer was turned back once too, in January 2023, before a further round of documentation finally got it across the finish line.

The outcome

In April 2024, the IRS accepted the Offer in Compromise on the business account. By late June 2024, the IRS confirmed the clinic had satisfied every condition of the accepted offer, and the account showed a zero balance. Combined with the personal penalty resolution two years earlier, both halves of a debt that started in 2010 were finally closed.

Why it matters

Payroll tax problems rarely stay contained to the business that owes them. When the IRS treats withheld payroll money as trust fund money, the person responsible for paying it over can end up personally exposed even while the company’s case is still being worked separately. This clinic’s situation took patience on both fronts, an installment agreement that did not stick, two settlement offers, and years of staying current on new deposits while the old debt got sorted out. None of that happens by waiting for the IRS to lose interest. It happens by putting real financial information in front of the IRS and not stopping after the first rejection.

Frequently asked questions

What is an IRS Offer in Compromise, and how does the IRS decide whether to accept one?

An Offer in Compromise is a formal application under IRC 7122 and IRM 5.8 that lets a taxpayer or business settle a tax debt for less than the full amount owed. The IRS looks at what it calls reasonable collection potential, meaning the realistic value of a taxpayer’s assets and future income, not just the size of the balance. Nationally only a minority of offers get accepted on the first try, so documentation and follow up matter.

What is a trust fund recovery penalty, and why can it be assessed against a business owner personally?

Payroll withholding is considered trust fund money under IRC 6672 because it belongs to the government from the moment it is withheld from an employee’s paycheck. When a business fails to pay that money over, the IRS can assess a trust fund recovery penalty, covered in IRM 5.7, against any individual it decides was responsible for collecting and paying the tax. That penalty is personal, so it can follow the individual even if the business later closes.

Does the IRS require ongoing payments while an Offer in Compromise is still being reviewed?

If the offer is filed under the periodic payment option on Form 656, yes. The taxpayer has to keep sending the proposed monthly payment amount to the IRS while the offer is pending, and those payments apply toward the total debt even if the offer is ultimately rejected. Missing those payments can cause the IRS to return the offer without a decision on the merits.

Can a business resubmit an Offer in Compromise after the IRS rejects it?

Yes. A rejection under IRC 7122 is not the end of the process. A taxpayer can appeal the decision or simply prepare updated financial information and file a new offer, which is common when circumstances have changed or the first submission was incomplete. It often takes more than one attempt before an offer is accepted.

Does resolving a trust fund recovery penalty against an owner also resolve the business’s underlying tax debt?

No, they are separate liabilities that have to be addressed on their own tracks. The trust fund recovery penalty under IRC 6672 is assessed against the individual, while the underlying payroll tax debt and any lien under IRC 6321 stay with the business until that balance is paid, settled, or otherwise resolved. Payments toward one can sometimes reduce the other, but each case still needs its own resolution.

Every case is different. Outcomes depend on a taxpayer’s specific financial situation, and PFGTAX does not guarantee any particular result or reduction in tax debt.

Falling behind on payroll taxes and worried the IRS could pursue you personally? Call PFGTAX at 888.572.2179 to find out where you stand before it escalates.