Many times a cash-strapped company will fail to deposit its payroll or other taxes. Unlike business creditors, Federal and state taxing authorities are not immediately at the company's door demanding their money. The company is aware of it's responsibility to pay taxes and has every intention of paying the tax deficiencies later, when cash is available. Yet that day never arrives, and the problem only compounds. Eventually, tax collectors will appear and seek to collect the tax, penalties, and interest owing by the company.
The tax authorities have collection tools such as liens and levies they can and will use to collect past due taxes. The taxing authorities may also assess the company's taxes as due personally from the company's "responsible persons"-those who controlled the company's available cash, and used it to pay debts other than taxes.
Under Internal Revenue Code Section 7202, anyone required to collect, account for, and pay over to the IRS any tax is guilty of a felony, punishable upon conviction by fine of up to $10,000, or imprisonment of up to five years, or both, for each offense. Let's hope you never find yourself facing that problem.
There are some things a company can do to protect the principals from personal liability for the company's taxes:
Keep the spouse out of harm's way. An assessment of corporate taxes against both spouses could wreak havoc on a marriage. The taxing authority will seek the tax assessment against each spouse individually.
If one spouse is an officer or director of the company, the other spouse should not have any control over the company's cash. In particular, the non-principal spouse should not be an authorized signer on any of the company's checking accounts.
Retain competent tax advise and counsel. A company with tax delinquencies needs to consult competent tax counsel about the problem. Inappropriate tax assessments may have been made against the company. The company may have grounds for seeking relief from tax penalties which have been assessed against it. The company may have made tax payments for which it has not been given credit. Perhaps the company should be advised to abandon its business entity.
Often the best advice I can give a company struggling to pay its payroll taxes is to allocate any voluntary payments against the company's outstanding trust fund obligations. Only a voluntary payment made by check (as opposed to electronic funds transfer) may be allocated.
Do not delay the tax assessment without a good defense. A mistake commonly made by a company delinquent in paying its taxes is to avoid tax collection authorities. This is ill advised, for many reasons. A cooperative working relationship with the taxing authorities severs the taxpayer's interests. There can be no such relationship if the taxpayer is evading the taxing authority.
Nearly every company has a "responsible person" subject to personal assessment for the company's unpaid taxes. Delaying the inevitable assessment of such taxes personally against the company's responsible persons delays the statute of limitations on collection of such assessments from beginning to run.
If you find yourself in this situation, all is not necessarily bleak - you may have defenses. Some examples I have come across are:
A physician used a payroll service for his medical office. As originally established, the payroll service automatically deposited the physician's payroll taxes with the taxing authorities as they became due. The physician later hired an office manager who, unbeknownst to the physician, contacted the payroll service company and discontinued automatic depositing of the physician's payroll taxes. The office manager then embezzled the funds that should have been used to pay the physician's payroll taxes. The physician had a defense to a trust fund recovery penalty assessment-and a cause of action against the payroll service company.
This situation would have been uncovered earlier by the use of a Part Time CFO such as Performance Advisors at much less cost than this physician spent correcting a problem caused by poor internal control.
In another case, the IRS audited a company and retroactively reclassified independent contractors of the company as employees, and, consequently, the amounts paid by the company to the reclassified workers as wages subject to employment taxes. The IRS began a trust fund recovery penalty inquiry concerning amounts paid by the company to the reclassified workers. We determined that this was inappropriate, because 100% of the amounts earned by the reclassified workers was paid out to them - there was no trust fund retained by the company.
The real lesson to be learned here is that it is far less expensive to do things right from the start - and then make sure they stay that way.
If you've had an awakening to the need for better internal control or the need to hire either a part-time or full time CFO, please consider the CFO services of Performance Advisors.
An important part of The Performance Advisor CFO services is Cash Flow Management. It's much easier to avoid a cash crisis if you forecast your cash needs in advance and prioritize your disbursements. Performance Advisors can help you avoid problems like those in the examples above. Contact Performance Advisors today at 602-579-5725 or email Performance Advisors today for ideas and assistance.
Performance Advisors can improve, streamline and mitigate any deficiencies within your accounting department allowing you to spend your time growing and managing your organization. We customize each engagement to the needs of the individual company including low monthly retainer agreements, special projects billed by the hour or filling the gap with employee transition.
If you answer "Yes" to any of the questions below, feel free to contact us for a free initial consultation and see how we can help improve your organization.
* Are you waiting until year-end for accurate, GAAP based financial reports rather than having them produced monthly and on a timely basis?
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* Are the processes within your accounting department not efficient or are the controls not adequate?
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"You must pay taxes. But there's no law that says you gotta leave a tip."
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