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LOCAL TAX STRATEGY BEING INVESTIGATED BY THE DEPARTMENT OF JUSTICE; FBI AND IRS CRIMINAL INVESTIGATION DIVISION SERVING GRAND JURY SUBPOENAS TO CPA’S ACROSS THE UNITED STATES WHO WERE INVOLVED IN THE STRATEGY.
In early February of this year, it was reported in the Dallas Morning News ( article) that the FBI and Criminal Investigation Division of the Internal Revenue Service raided the offices of prominent tax attorneys in Dallas, Texas. Almost simultaneously, the FBI and IRS agents also served many CPA’s across the country with Grand Jury Subpoenas for the CPA’s involvement in a tax strategy that was promoted by the same tax attorneys.
Although there has been no formal announcement by the FBI, IRS or the Department of Justice, it is apparent the federal government is investigating the “abusive” nature of the tax strategy and that the matter is serious enough to have criminal implications for all of those involved.
Our office has served a number of clients who have been contacted by the FBI and/or the IRS related to a federal tax investigation. If you or your CPA have been served with a Grand Jury Subpoena, contact our office for assistance.
I OWE TAXES THAT I CANNOT PAY – COMMON QUESTIONS AND PRACTICAL ANSWERS
Many people during tax time discover that they owe federal income taxes but cannot pay the total amount owed. Other taxpayers let tax time serve as a reminder that they have not filed their income tax returns for several years, resulting in the recurring and burdensome thought that they could owe a significant amount of tax when they do finally file those past returns. As a result, people in these situations have many questions, some of which are listed and answered below:
1. Will I go to jail? The answer to this question requires much more discussion and analysis with the taxpayer before answering. However, if you are a taxpayer who simply failed to withhold enough taxes from your pay check, or failed to pay sufficient estimated tax deposits during the years such that you owe taxes when you file your return, then generally speaking, you are at a low risk for a criminal probe and therefore should not worry about going to jail. However, if you have acted in such a way that those acts could be construed as an attempt to avoid the payment of tax or the collection of tax, then you might have some risk of a criminal probe into your failure to file your tax return or to pay taxes. It is not a crime to owe federal taxes unless you had a bad motive in accruing the tax liability. It is best that you talk to an experienced tax attorney regarding your actions if you feel there is some risk of a criminal probe.
2. Do I have to pay the entire balance due at one time? Usually not. The IRS is willing to work out a payment plan if you cannot full-pay the liability. The payment can be an easily determined and fixed amount, if the total of the original taxes, penalties and interest owed is less than $50,000. However, if you owe more than $50,000, determining the amount of the installment payments requires some computations based on your level of income and expenses. Negotiating a payment plan with the IRS requires an understanding of your exact options at the time the IRS begins its collection efforts. While using an experienced tax attorney is not required, it might be best to employ such an attorney so that you can negotiate a payment plan with monthly payments that you can comfortably maintain.
3. What if I cannot afford to make any payments? The IRS will not force you to make payments if you do not have income above and beyond your reasonable and normal living expenses to make any payments. However, in order to convince the IRS that you cannot afford to make any payments, you must provide information to support the reason for nonpayment. Generally, you must provide your normal income and monthly expense obligations and if that information shows you cannot afford to make any payments, the IRS will place you in “currently not collectible” status. However, the IRS will determine whether your normal monthly living expenses are reasonable or not, so don’t expect that your expenditures for luxury automobiles, oversized housing, or private school, among other items, will pass scrutiny with the IRS. While “currently not collectible” status sounds like a great alternative, you must realize that penalties and/or interest continue to accrue so that the balance will continue to grow rather than go away. On the other hand, there may be certain instances where currently not collectible status is clearly the best option for you. If you cannot afford to make payments then you should talk to an experienced tax attorney about analyzing your situation to determine whether obtaining currently not collectible status is best for you.
4. I hear a lot about settling taxes for “pennies on the dollar”; why can’t I do this? This program is known as an “Offer-in-Compromise” (“OIC” or “Offer”). If you qualify for an “Offer then you should definitely pursue this route. While not all taxpayers qualify for an OIC, it is a great alternative if you do. An OIC allows you to compromise your tax debt to a dollar figure that is usually much less than the amount of the taxes owed. If you are a taxpayer who struggles to make ends meet every month with your current level of income, and you do not own significant assets from which the IRS can collect, then you may be an excellent candidate to file an OIC. On the other hand, taxpayers who have a significant income, or who have significant assets usually do not qualify for an OIC. Whether or not you qualify for an OIC requires a careful analysis of your financial situation. The IRS will not simply accept a stated offer that does not fit within the OIC regulations and guidelines. If you would like to explore whether you qualify for an OIC, contact an experienced tax attorney.
5. How long does the IRS have to collect past due taxes? Generally, there is a ten (10) year statute of limitations on collection after which time IRS is barred from collecting the tax. However, you should know that the 10 year period doesn’t start to run until you file your return and the tax is assessed, or in other words, when the tax “goes on the books.” Therefore, if you have never filed a return, the 10 year collection period never begins. Sometimes, the IRS will prepare a return on your behalf (a “substitute” return or “SFR”). In order to determine when the statute of limitations started, you must determine when the IRS completed its preparation of your return, which usually occurs several years after the return was originally due. Additionally, there are many things that toll, or extend, the 10 year collection period, so you must be aware of those items as well. While you might believe that the taxes you owe are almost 10 years old and therefore the collection period is about to expire, you should contact an experienced tax attorney to review your tax account information to help you determine whether waiting for the 10 year statute of limitations on collection is the best alternative for you.
6. Are my taxes dischargeable in bankruptcy? Once again, the answer to this question requires a much longer discussion with the taxpayer to determine whether the taxes involved are dischargeable. The rules regarding the discharge-ability of taxes are very complex and require a thorough analysis of the history surrounding the taxes owed. Generally, income taxes older than 3 years may be dischargeable but there are many other tests and factors to be examined before you can safely conclude that your taxes are dischargeable. Payroll taxes are never dischargeable. Additionally, under current bankruptcy laws, if the IRS prepared a return on your behalf, then the income taxes resulting from those returns are never dischargeable. The bottom line is that you need an experienced tax attorney to review your tax situation to determine whether your taxes are dischargeable in bankruptcy.
7. Which of the above solutions are best for me? The answer to this question requires a careful analysis of your tax situation. Everyone’s federal tax situation is different and an experienced tax attorney should know that each of the above alternatives should be investigated and analyzed to determine which one fits you. If your tax professional cannot answer your questions about each situation above, then it is possible that you may not be considering all your available alternatives.
AM I LIABLE FOR THE PAYROLL TAXES OF MY COMPANY IF THEY ARE NOT PAID?
By David Coffin of David Coffin PLLC on Wednesday, February 19, 2014.
AM I LIABLE FOR THE PAYROLL TAXES OF MY COMPANY IF THEY ARE NOT PAID?
By David B. Coffin ©
Any company with employees is responsible for paying payroll taxes for its W-2 employees. Payroll taxes are due regularly, and in troubling times, many struggling businesses get behind in paying payroll taxes to the IRS. If you are an owner, officer, manager or employee of that company, can you be held liable for the company’s failure to pay its payroll taxes?
The short answer is – you might be.
Payroll Taxes in General
Generally speaking, payroll taxes paid by a company are made up of three components: 1) Social security tax; 2) Medicare tax; and 3) employee’s income tax withholdings. These taxes are broken down into two groups, the employer’s portion and employee’s portion.
A. Employer’s Portion
-Social Security
-Medicare
B. Employee’s Portion
-Social Security
-Medicare
-Income Tax Withholdings
The IRS calls the employee’s portion the “Trust Fund” taxes because the company is supposed to be holding these taxes in trust for the employees, which are to be paid over to the IRS.
The payroll taxes are usually required to be paid over (or deposited) fairly regularly, sometimes after each payroll. Obviously, the IRS is not too happy when a company fails to pay its payroll taxes. The problem lies in that many companies who have cash flow problems use the IRS as a creditor of first resort. Oftentimes, it is almost inviting to wait to pay the IRS. That is because it is all too easy to pay creditors who complain.
On the other hand, our system of paying and depositing payroll taxes is largely voluntary, and there is no IRS agent pressuring a company to pay its taxes if it misses one, two, three or even four or five deposits. Sometimes a company will not hear anything from the IRS for several months after failing to deposit the taxes. By that time, the unpaid payroll taxes have accumulated to large balances and the company has spent the taxes that were to be deposited.
So, when the IRS comes calling, can it collect from you?
Personal Liability Depends on Structure of Business
Sole Proprietor – Owners Liable for 100% of Payroll Taxes
Businesses that operate as a sole proprietor, i.e., “Schedule C” businesses, are those that are not operated out of Corporations, LLC’s or any other entities with limited liability. These types of businesses have one owner (or two if husband and wife) and report their business income and expenses on their individual income tax returns (Form 1040). With regard to payroll taxes, the principals or owners of these types of businesses are liable for the entire amount of the payroll taxes that have gone unpaid for their business.
General Partnerships – All Partners Are Liable for Unpaid Payroll Taxes
General partnerships consist of two or more partners but are not incorporated, or not organized as a Limited Liability Company or a Limited Partnership. Under state general partnership law, all partners are liable for the debts of the partnership. This includes payroll taxes. So if you are a partner of a general partnership that owes unpaid taxes, you are also personally liable for the entire amount of the partnership’s unpaid taxes.
Corporations, Limited Partnerships and LLC’s – “Responsible Persons” who Willfully Fail to Pay Over Payroll Taxes are Liable for the Trust Fund Portion.
Corporations, Limited Partnerships and LLC’s are all created by state law and usually have officers or managers running the company’s operations. Management of these small businesses normally consists of one person in charge of both company operations and finances, or one person in charge of operations and another in charge of finances.
Responsible Persons
With regard to unpaid payroll taxes, federal law provides that the IRS may pursue collection against “responsible persons” of the company for the Trust Fund portion of the payroll taxes.
There are several factors the IRS looks to in determining whether an individual is a responsible person. Generally speaking, individuals in the company may be found to be a “responsible person” if they have the authority to make financial decisions of the company or to pay creditors. More specifically, IRS looks at whether the individual’s duties can:
1. Determine financial policy for the business?
2. Direct or authorize payments of bills/creditors?
3. Prepare, review, sign, or authorize transmit and payroll tax returns?
4. Have knowledge withheld taxes were not paid?
5. Authorize payroll?
6. Authorize or make Federal Tax Deposits?
7. Authorize the assignment of any EFTPS or electronic banking PINS/passwords?
From these factors, Revenue Officers, who are investigating these matters for the IRS, determine whether to deem an individual a “responsible person.”
Often times the Revenue Officer will summons the company’s bank records to determine who had the authority to sign checks and who in fact signed checks during the period the payroll taxes went unpaid.
Even low level employees with check signing authority sometimes do not pass the scrutiny of the IRS and, if they have a number of the duties above, are deemed “responsible persons” who may be liable for the unpaid Trust Fund portion of the payroll taxes.
Willfulness
Once an individual is deemed a responsible person, the Revenue Officer determines whether that person willfully failed to pay over the payroll tax. Generally, the Revenue Officer looks for the answer to the question: During the time the delinquent taxes were increasing, or at any time thereafter, were any other financial obligations of the business paid?
If the answer to the above question is yes, then any responsible person who had knowledge of such payment is deemed willful.
It is common for the IRS Revenue Officer to find that upper level management, who have the ability to make business financial decisions, are responsible persons who willfully failed to pay over the payroll taxes to the Government.
Sometimes, lower level employees get caught in the determination process, as well. Suppose, for example, an accounts payable clerk has check signing authority and knows that the payroll taxes of a company have not been paid. If the clerk signs any checks for the payment of other creditors, after learning that the payroll taxes were due, it is possible that the IRS will determine that the clerk is a responsible person who willfully failed to pay over the payroll taxes to the Government.
While the company remains liable for 100% of the unpaid taxes plus penalties and interest, the responsible person can be held liable for the Trust Fund portion of the payroll taxes.
Conclusion
Because payroll taxes often represent monies withheld from employees’ paychecks to be held in trust and paid over to the Government, the IRS places a premium on the collection of these taxes. I have described above how the IRS views the collection of payroll taxes. With regard to the collection of Trust Fund taxes, be aware that a Revenue Officer’s determination is not always correct. Once the determination is made that an individual is liable for Trust Fund tax, the individual has the chance to challenge that determination. If your company has been visited by a Revenue Officer who is looking into the non-payment of payroll taxes, rest assured that part of the Revenue Officer’s function is to find as many “responsible persons” as possible to ensure the Government will have many sources from which to collect the Trust Fund taxes. The employees of David Coffin PLLC handle the collection of payroll taxes, and have a significant amount of experience helping individuals either avoid the “responsible person” designation, or minimizing their exposure if the designation is appropriate. Please call if you are in need of our services.