Small business owners have so many business tax responsibilities – income taxes (federal and state of course) sales taxes (now hugely more complicated than even a year ago), excise taxes, city and county taxes, franchise taxes, many special taxes, and of course payroll taxes. This is where part of employee pay is withheld and reported as turned over to the state and federal governments. But sometimes it isn’t. As in cases where the business is short on cash.
We see this a lot (since besides QuickBooks bookkeeping and accounting we are in the tax prep and tax resolution business), and it happens more often than anyone wants to say – as cash flow ebbs, the payroll taxes that were withheld from paychecks instead funds daily operating expenses of the business. Management knows that this is – a problem – and sweats it out for sure, hoping beyond hope that things will suddenly turn around, cash will pour into the bank accounts, everyone will get paid, and the IRS and state governments (herein, “IRS” shall mean the IRS and / or state tax authorities) will never really notice. But this kind of outcome is rare, and digging out of this type of mess is quite difficult. So – will the IRS ever notice? And what happens then?
Tax Repayments and Tax Penalties
Meanwhile, the penalties add up, and there are many: failure to deposit, failure to file, interest, and eventually collection fees. And soon after an IRS Revenue Officer shows up at your main entrance and wants to talk – now – about what is going on here and lays out the bleak payroll tax delinquency situation. And as everyone knows by now, the total tax amount due is way beyond what the business can pay.
There are often just two reasons why the IRS doesn’t immediately shut down the business and liquidate all assets – they are not keen to throw so many people out of work (who also would no longer pay taxes); and they would lose any chance of collecting future taxes. So they talk about “tax resolution plans” aka “tax workouts.”
Tax Compliance
But this cannot begin until the business first gets “into compliance.” Before any talk of a workout deal, all accounting and bookkeeping must be properly entered, completed and updated. Once this is finished all payroll tax returns must be completed and filed, and all business income tax returns must similarly be filed. Often this includes the personal tax returns of the owners too, and sometimes this goes back many years. Supporting records are sometimes sparse and difficult to find, and all of this catch-up accounting and tax preparation can be a gargantuan task.
Usually the business cannot pay the amounts due (and remember that while the accounting and taxes are being updated, which often takes months, penalties, interest and new taxes continue to accumulate. So if the business cannot write a big check to make the problems go away, a Trust Fund Recovery Penalty will be assessed, and besides the business, this may well also name the business owner(s) and other responsible parties such as anyone who has signature authority on company bank accounts.
This can quickly stop your business in its tracks!
So now you are at the mercy of the tax authorities. Just what no one wants. Ever. So what do they do next?
Can The Business Attain Solvency?
This means is the business really a viable entity? Looking ahead, a business that cannot pay its taxes, no matter how staggering, is not a viable business. Business owners will often just not fess up to this, and sometimes go for years pursuing a venture that is just never going to get off the runway. Things will not suddenly turn around. Everyone knows it but the business owner. So maybe that is the silver lining here: cut your losses and move on. And the IRS perspective is that if a business cannot stay current on its taxes (and other obligations), then it should call it should close its doors for good.
Also note that a sinking business can pull down many other assets. For example, a bad stock pick can only decline in price to $0. But a bad business can require liquidation of other assets such as homes and other real-estate, savings accounts, retirement accounts, valued vehicles and much more If the IRS determines that it’s best that you’re your business should liquidate – maybe they are right and in this way doing you a favor
But let’s say the IRS determines that your business should try for a turn-around and is indeed a viable business. Now what?
Tax Workouts for C-corps
For standard C-corps the debt is settled via an IRS installment agreement, and includes penalties and interest. No business owner will ever conclude that this was a great way to borrow money. Also note that this assumes the owners have taken reasonable salaries over time; if too much salary (over market levels) has been drawn, the IRS will not like this at all and will take measures to recover the over-payments.
Tax Workouts for Sole Proprietorships
For sole proprietorships (aka “disregarded entities” or “dba’s” or “Schedule C’s”) the IRS will work from IRS Forms 433-A (Collection Information Statement) for non-businesses (such as individuals) to obtain current financial information and from Form 433-B (Collection Information Statement for Businesses). It is quite important that all assets and debts be disclosed accurately and honestly, or even bigger problems may follow.
Tax Liens
Along the way, the IRS will have placed liens on all business assets. And even if their filing is late, they will still have first call on liquidation of business assets thanks to statutes. If the business cannot comply with the IRS installment agreement or otherwise settle, any assets that have liquidation value will be seized and sold, and sales or liquidation proceeds will be applied to the outstanding payroll tax debts. If assets are sold by the business instead of the IRS after the lien is in place, the consequences may be severe.
Trust Fund Recovery Penalty (“TFRP”)
Also expect that a Trust Fund Recovery Penalty (“TFRP”) to help recover IRS collection costs will be assessed on the owner(s) and other involved parties. At this point the IRS will then roll up their sleeves and manage the case on an individual level, and among other things consider collecting the debt from anyone involved until the TFRP has been settled in full.
From start to finish, all of this can take years.
Summary
In summary, businesses sometimes “borrow” from the IRS to meet cash needs by not properly reporting and submitting payroll taxes. This is a sign of desperation and will not end well.
We can help. QB-LA can get your accounting entered and updated, and help negotiate the best deal possible with the IRS and state tax authorities. If your business has tax payments or tax debt issues, contact us today and let’s talk.
