What Are the Steps to Bring Payroll Returns Current, and What Penalties and Relief Options Are Available?

Bringing payroll returns current is about three things: filing any missing returns, paying what you can, and working with the IRS to resolve penalties and future compliance. The faster you act, the more options you’ll keep and the lower your long-term cost in interest and penalties (IRS guidance: Understanding Payroll Taxes and Penalties and Interest).

Step-by-step checklist

  1. Identify delinquent returns and deposits
  • Pull payroll records, prior Form 941/944 filings, EFTPS payment history, and any IRS notices. Request an IRS account transcript or wage/tax transcript if records are incomplete (IRS: Understanding Payroll Taxes).
  1. Gather documentation
  • Employer payroll reports, payroll tax liability ledgers, payment receipts, and correspondence from the IRS.
  1. Calculate liabilities
  • Total unpaid deposits (trust fund amounts withheld), employer taxes, plus accrued interest and penalties. Use IRS account information and notice balances; don’t rely only on internal estimates.
  1. File delinquent returns promptly
  • File the missing Forms 941 or 944 (or applicable quarterly/annual forms) even if you cannot pay the full balance. If a prior return needs correction, use Form 941-X (Adjusted Employer’s QUARTERLY Federal Tax Return) to correct wages or deposits.
  1. Make a good-faith payment
  • Pay as much as you can to reduce interest and prevent more severe collection steps. Use EFTPS or IRS Direct Pay for federal deposits.
  1. Contact the IRS and explore relief
  • Request an installment agreement, explore penalty abatement (first-time abatement or reasonable cause), or—in rare cases—offer in compromise. If collections are imminent, request a Collection Due Process hearing.
  1. If employee trust funds were used improperly, prepare for stronger enforcement
  • The IRS can assess the Trust Fund Recovery Penalty (TFRP) against responsible persons (26 U.S.C. §6672). This is personal liability for withheld income and FICA taxes.

Sources and forms: IRS pages on Understanding Payroll Taxes, Penalties and Interest, and Form 941/Form 944 filing instructions (see IRS links below).

Common penalties you may face

  • Failure-to-file (returns): Generally assessed at a percentage of unpaid tax per month up to a statutory maximum.
  • Failure-to-pay (taxes shown on a return): A monthly penalty applies on unpaid tax balances.
  • Deposit penalties (Federal Tax Deposit penalties): Percent-based penalties depending on how late deposits are made; the IRS posts specific thresholds and schedules.
  • Trust Fund Recovery Penalty (TFRP): Personal liability for responsible persons who willfully fail to collect, account for, and pay over trust fund taxes.

For detailed descriptions see IRS resources: Penalties and Interest and the Employer’s Tax Guide (Publication 15).

Relief options — how to reduce or remove penalties

  • First-Time Penalty Abatement (FTA): May remove certain penalties for taxpayers with a clean recent history. Check IRS criteria before applying. (IRS penalty relief guidance.)
  • Reasonable Cause: If you can show circumstances beyond your control (serious illness, natural disaster, or reliance on erroneous professional advice), the IRS may abate penalties.
  • Installment Agreement: Request an online payment agreement to pay over time. Interest and some penalties will continue to accrue, but collection actions may be paused.
  • Offer in Compromise (OIC): Rare for payroll tax trust fund liabilities because withheld taxes are prioritized, but it is available in limited cases.
  • Penalty abatement for deposit penalties or late-file penalties may require documentation and timely proactive contact with the IRS.

Practical items employers should know

  • File first, pay later if necessary: Filing missing returns stops the failure-to-file penalty from growing; payment can be addressed by agreement.
  • Prioritize trust fund deposits: Employee withholding and FICA deposits are trust funds the employer holds in trust for the government—using them for operations risks the TFRP and criminal exposure.
  • Correct errors with Form 941-X: Use 941-X to correct previously filed 941 returns and to adjust tax liabilities before the IRS issues assessment.
  • Keep complete documentation: If you ask for abatement for reasonable cause, the IRS will expect records proving the circumstances.

When enforcement escalates

If you don’t act, the IRS can file federal tax liens, levy bank accounts or payroll, and assess the TFRP against responsible individuals. Large or repeated delinquencies attract audits and more aggressive collection activity.

Interlinks for additional reading

Quick practitioner tips

  • Act immediately on any IRS notice; delay narrows relief options.
  • Engage a CPA or tax attorney when TFRP, multiple years, or collections are involved — in my practice, early representation often preserves abatement eligibility.
  • Automate deposits and filings with payroll software or EFTPS to prevent repeat problems.

Authoritative resources

Professional disclaimer: This article is educational and does not replace personalized tax advice. Consult a CPA or tax attorney for help with specific payroll tax problems.