Pyramiding: What Happens When a Business Keeps Adding New Payroll Tax Debt

Most businesses that fall behind on payroll taxes do not plan to stay behind. They miss a deposit, then another, and promise themselves they will catch up. Meanwhile, every new payroll creates new withholding that also does not get deposited.

The IRS has a name for that pattern. It calls it pyramiding, and it has a dedicated section of the Internal Revenue Manual, IRM 5.7.8, on how Revenue Officers deal with it. If your business is in that pattern, this is the playbook being used on you.

Two Labels: Repeater and Pyramiding

IRM 5.7.8 uses two related terms, and the IRM tells Revenue Officers it is important to recognize the difference.

Repeater

IRM 5.7.8.3 defines a repeater as a taxpayer with more than one module in delinquent account or delinquent return investigation status that came into existence within the last two years. A taxpayer that maintains two years of compliance with no new delinquencies is no longer considered a repeater.

Pyramiding

IRM 5.7.8.4 defines a pyramiding taxpayer as one that is:

• in business;
• not current with federal tax deposits; and
• has two or more trust fund modules assigned to Field Collection.

The IRM says a taxpayer that pyramids is not demonstrating a good faith effort to comply. It also says that taxpayers who make timely and adequate deposits after contact and file all outstanding returns are in compliance and are no longer considered pyramiding.

That last sentence is the most important one in this guide. Pyramiding is a status you can leave.

Why the IRS Cares So Much

IRM 5.7.8.1.1 states that promoting payroll tax compliance is a top priority for the IRS because two thirds of federal taxes are collected through the payroll tax system. It describes early intervention and continuous monitoring of federal tax deposits as ways to keep in-business taxpayers from pyramiding.

The trust fund concept explains the urgency. Withheld taxes are held in trust under IRC 7501, and employees get credit for withholding even if the employer never pays it over, under Treasury Regulation 1.31-1. Every pyramided quarter is government money the government has already credited to someone else. See our section 7501 guide.

Small Employers Can Pyramid Too

Pyramiding is not limited to large payrolls. IRM 5.7.8.4 warns that employers filing the annual Form 944 can pyramid liabilities when payroll tax exceeds $2,500. The IRM explains that Form 944 is meant for employers expecting a payroll tax liability below $1,000 a year. If a Form 944 filer's liability reaches or exceeds $2,500 for a calendar quarter, it is not exempt from the regular deposit rules and must make monthly or semiweekly deposits under its deposit schedule. A small business that grew, kept filing Form 944, and never started depositing can find itself owing a full year of withholding at once.

What the Revenue Officer Is Told to Do

IRM 5.7.8.5 lays out the approach for repeat and pyramiding employers:

• Fast contact. Attempt initial contact within 45 days of receiving the case, with a focus on preventing further pyramiding.
• At the business. When the taxpayer has a representative, the IRM says an appointment will be made to meet at the place of business, to review payroll records, view assets and observe the operation. If that is not possible, the reason is documented and a field call to view assets is to be made before closing, if practical.
• Form 4180 at the start. During initial contact, conduct a TFRP interview on Form 4180, calculate the potential penalty and review it with the taxpayer.
• Deposit monitoring. Tell the taxpayer to stay current, document the deposit schedule, secure electronic payment confirmations, and monitor deposits until the case is resolved.
• Deadlines in writing. Use Form 9297, Summary of Taxpayer Contact, to list required deposits and verification dates.
• Enforcement notices. Issue Letter 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing, at initial contact, and consider Letter 903 where there are limited assets or no deposits.

The IRM's bottom line: pyramiding must be stopped immediately. If acceptable proof of compliance is not provided, enforcement action follows. If routine actions do not stop it, the IRM tells Revenue Officers to consider alternatives including seizure of physical assets and injunctive relief.

The Enforcement Ladder

Levies

Repeat payroll tax debtors can lose the usual pre-levy hearing. IRM 5.7.8.5 notes that if the taxpayer previously requested a CDP hearing for employment taxes and pyramided more liabilities, a disqualified employment tax levy may be appropriate, with post-levy hearing rights. Our guide on receivables levies explains the IRC 6330(h) rule.

Liens

The IRM says a Notice of Federal Tax Lien should generally be filed on pyramiding taxpayers unless manager approval is secured to defer or not file.

Seizure

IRM 5.7.8.5.1 says that if a repeater accrues additional unpaid trust fund liabilities after contact, the Revenue Officer conducts a risk analysis and a seizure should be made if it is the most appropriate action. The IRM characterizes taxpayers who keep pyramiding after contact as "won't pay" taxpayers for whom the Revenue Officer must proceed with enforced collection.

Letter 903 and injunctions

When levy sources are exhausted and there are no assets to seize, IRM 5.7.8.5 points to Letter 903 and civil injunctions under IRC 7402(a). Our guide on Letter 903 and section 7512 covers that stage.

The TFRP

Through all of this, the trust fund investigation runs. IRM 5.7.8.5.2 says that if the liability is not fully paid at initial contact, the Revenue Officer begins the TFRP investigation and makes a collectibility determination for those found responsible and willful. It adds that even when a taxpayer stops pyramiding and becomes compliant, a TFRP determination must still be made.

What Pyramiding Does to Your Options

Pyramiding closes doors.

• Installment agreements. IRM 5.7.8.5 says installment agreements are not appropriate for taxpayers who continue to accrue liabilities after contact. Payment plan rules generally require current deposits before an agreement is granted.
• Simple payment plans. IRM 5.14.5.4 says a Simple Payment Plan (Business Trust Fund) is not to be granted where the case meets "solely to delay" criteria, including where there is an indication the business may be using pyramiding or successor entities to avoid tax responsibilities.
• Offers in compromise. IRM 5.7.8.5.3 says in-business taxpayers offering to compromise employment taxes must make timely deposits and file returns while the offer is considered, or the offer is returned without appeal rights. The TFRP must also be addressed before an offer on trust fund taxes is investigated. See our offer guide.

The IRM also says decisions on agreements, currently not collectible status or offers should not be based solely on the repeater or pyramiding label, but in conjunction with other factors, including cooperation, the ability to stay current, and the ability to remain solvent while paying.

How to Get Off the Pyramid

1. Make this payroll's deposit. Not the old ones. This one. Then the next one.
2. Prove it. Keep electronic payment confirmations and send them to the Revenue Officer by the dates on Form 9297.
3. File every outstanding return. The IRM's definition of compliance includes filing all outstanding returns.
4. Shrink payroll if you must. A business that cannot afford its payroll taxes cannot afford its payroll. That is a hard truth, and the IRM's willfulness rules make it a personal one for the owners.
5. Then propose a plan for the old quarters. With current compliance documented, options reopen. See our guide to business trust fund payment plans.

For a broader look at the firm's payroll tax work, see the main site's payroll tax page.

You cannot negotiate your way out of a hole you are still digging. Stop digging first. Then call (813) 229-7100 and let's talk about the hole.