What Is a 941 Assessment and What Should I Do?

An IRS 941 assessment is a formal declaration that a business owes more in payroll taxes than it reported or paid, signifying a discrepancy with the employer’s filed Form 941. When a business receives an assessment, it means the IRS has adjusted the account to reflect what it calculates as the correct tax liability. This new total includes any penalties and interest that have accrued. Ignoring the notice can lead to further collection actions and significant financial consequences.

Common Reasons for a 941 Assessment

A primary trigger for a 941 assessment is a miscalculation on the original return. These can be simple arithmetic errors in adding up wages or in computing the Social Security and Medicare taxes due. The complexity of the form leaves room for such mistakes.

Another cause is the failure to make timely payroll tax deposits. Businesses are required to deposit these taxes on either a monthly or semi-weekly schedule, determined by their past tax liability. Not adhering to this schedule, even if the Form 941 is filed correctly, results in failure-to-deposit penalties.

Failing to file a Form 941 for a quarter or filing it after the deadline are also common reasons for an assessment. If a return is not received, the IRS may create a substitute return based on prior filing history, which often results in a higher tax liability. Late filing automatically incurs a failure-to-file penalty.

Discrepancies between different tax filings can also lead to an assessment. At the end of the year, the IRS compares the total wages on the four quarterly Forms 941 with the totals on the annual Form W-3 and employee Forms W-2. If the totals do not match, the IRS will issue a notice proposing changes to reconcile the amounts.

Understanding the IRS Notice

The IRS communicates a 941 assessment through a formal notice, such as a CP161 notice. This document is a statement of a tax liability that has been officially added to your business’s account. The first step is to examine the notice to identify the specific tax period in question, as it will state the quarter and year for which the adjustment has been made.

The notice provides a detailed breakdown of the total amount the IRS claims is due. It is itemized to show the original tax discrepancy, any failure-to-pay penalties, failure-to-deposit penalties, and the interest that has accrued on the unpaid balance. This breakdown clarifies how the total liability was calculated and can help pinpoint the source of the problem.

The notice includes a response deadline by which you must either pay the assessed amount or formally dispute it. Missing this deadline can waive certain appeal rights and will lead to the escalation of collection activities. The notice will also contain the specific IRS contact information, including the address for the department that issued it.

Responding When You Agree with the Assessment

If you review the notice and agree the assessment is correct, the most direct action is to pay the amount in full. Payment options include IRS Direct Pay, the Electronic Federal Tax Payment System (EFTPS), or mailing a check with the payment voucher. Paying promptly prevents further interest and penalties from accruing.

If you agree with the assessment but cannot pay in full immediately, you can request an installment agreement. This allows for monthly payments over an extended period. You can apply online through the IRS’s Online Payment Agreement tool for liabilities of $25,000 or less, or by submitting Form 9465.

While interest and penalties still accrue on the unpaid balance, an approved agreement prevents more aggressive collection actions. In cases of significant financial hardship, an Offer in Compromise (OIC) may be an option. An OIC allows a taxpayer to resolve their tax debt for less than the full amount owed, but eligibility requirements are stringent.

Challenging an Incorrect Assessment

If you believe the assessment is incorrect, you can challenge it. A first step is to request a penalty abatement, which asks the IRS to remove penalties. This is done by sending a letter with your response, arguing you had “reasonable cause” for the error, such as a natural disaster or serious illness, and providing supporting documentation.

Correcting the underlying tax return is another step, accomplished by filing Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. This form amends a previously filed Form 941. On Form 941-X, you must detail the original amounts, the corrected amounts, the difference, and provide a written explanation for each change.

If your initial dispute is denied, you can request a review with the IRS Independent Office of Appeals. This office is separate from the division that issued the assessment and resolves tax controversies impartially. You have 30 days from the date of a rejection letter to file a formal protest and request an Appeals conference.

The Trust Fund Recovery Penalty

A significant risk with unpaid 941 taxes is the Trust Fund Recovery Penalty (TFRP). This penalty addresses the portion of payroll taxes held “in trust” for the government—specifically, the federal income tax and the employee’s share of Social Security and Medicare taxes withheld from paychecks. Because these funds belong to the employee, the IRS considers their misuse a serious offense, and the TFRP is a mechanism to recover these taxes directly from the individuals responsible.

The IRS can assess the TFRP against any “responsible person,” a term that is broadly defined beyond just the business owner. A responsible person can be an owner, director, employee, or even a third-party accountant—anyone who had significant control over the business’s finances and the power to decide which creditors were paid. The key factor is the authority and duty to ensure the taxes were paid, and the IRS can assess the penalty against multiple individuals for the same tax debt.

For the TFRP to be applied, the failure to pay must be “willful.” Willfulness does not require malicious intent; it means the responsible person was aware, or should have been aware, that the taxes were due and either intentionally paid other creditors instead of the IRS or showed reckless disregard for whether the taxes were being paid. Choosing to pay suppliers or net payroll while knowing trust fund taxes were outstanding is a willful act, making the person liable for the unpaid trust fund portion of the debt.