Don’t Put Mom In a Payroll Tax Ditch!

The Scenario – You need to make payroll this week but don’t have the cash. So, you go to Mom for a loan. She wants to help, but has limits.  So, she writes you a check for the exact amount of the net payroll, and good record-keeper that she is,  writes in the memo, “Net payroll due June 19, 2020.”

NOT such a great idea!

IRC Section 3505 allows the IRS to collect unpaid payroll Trust Funds from third party lenders. This applies when lenders lend funds for payroll knowing that the employer could not or would not deposit the required federal payroll taxes.

Yes, taking a loan for the net amount of the payroll is reasonably good proof that the loan was only for payroll; it was unlikely that the corresponding payroll deposit would be made. The IRS uses this evidence to assess the unpaid taxes on Mom, who may no longer love you as much.

How do you avoid alienating Mom? Do what professional lenders do in such loan circumstances. First, they’d never make the loan for the exact amount of the net payroll. Second, the loan agreement would NOT specify that the money was to be spent on payroll. This is a reasonably easy way to avoiding putting Mom down a hole.

If you or someone you know has received a Notice of Intent to Levy or has some other federal or state tax problem, please feel free to call or text me at (352) 317-5692  or email me at jim@taxrepgainesville.com .

Smart Way to Pay Late Payroll Taxes

The Scenario – Your business has fallen behind on paying payroll taxes. You can borrow some money, but not enough to pay off the full past due amount. Now what?

The answer is that you want to minimize the impact of the IRS assessing a penalty on you personally for 100% of the unpaid Trust Funds. The way you do it is to make a voluntary payment with a check. On that check you want to write in the comments section “Trust Funds Only”.  Due to Revenue Procedure 2002-26, the IRS must comply with your request on how to apply the payment against your account.

Why is this good? Sooner or later the IRS is going to get around to collecting those payroll taxes. Their big tool in this process is to access a penalty on the “responsible parties” equal to 100% of the money withheld from employees’ paychecks for income, social security, and medicare taxes. If you make a payment for the business to cover part of the past due amount without any designations, the IRS will automatically apply it first to the unpaid employer taxes. This allows them to maximize the 100% penalty when it is assessed.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com .

Can’t Pay Your Payroll Taxes?

Despite shrinking revenue, many businesses owners are choosing to keep valuable employees during the coronavirus shutdown.  And with cash in short supply, it’s tempting to ‘defer payroll tax deposits to the IRS.

I assure you,  going broke owing the IRS for payroll taxes is the worst mistake a business owner can make.

It’s time for a new game plan! Companies that are unable to make their required payroll tax deposits —and are out of borrowing power —have these choices:

  1. Downsize the staff to a level you can afford. This may mean going back to the owner being the only employee. But drastically cutting your overhead will allow you to get by while exploring other avenues.
  2. Close altogether.
  3. Or, take the biggest risk of all – keep things as they are, and hope things get better.  This approach has led a lot of people to a decade of grief. They continue to pay payroll, but stop making their payroll deposits.

You might think that the payroll tax is a corporate liability and that you personally can walk away. Think again. The IRS can and will assess a penalty equal to the trust funds (taxes withheld from the employees) on anybody that they feel is responsible for not paying them. Every business owner with check-signing authority will most likely be considered a responsible person. Here is the disaster — you cannot get rid of this penalty by filing individual bankruptcy. The IRS is going to be after you for at least 10 years.

If your cash flow is not cutting it, options 1 and 2 are your best bet. Your life will probably recover in 2 to 5 years and you can mark it up to lessons learned. Failing at option 3 will greatly expand your suffering.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com .

 

Payroll Protection Plan Has a Nasty Hook

The IRS has rained upon the PPP parade. The CARES Act sounded like a great thing to keep many small businesses in operations while everybody sheltered at home. Loans at 2.5 times monthly payroll have been issued at super low interest rates. One of the provisions under the Payroll Protection Program declared that amounts spent on payroll, rent, and utilities would be forgiven. What’s more, the amounts forgiven would not be considered to be taxable income, which is usually the case with forgiven loans.

Now IRS Notice 2020-32 has put the kabash on this part of the Act. While the forgiven amounts will not be income, the expenses used to qualify for that write-off are not going to be deductible. This does make a certain amount of sense since allowing the deductions for expenses paid by someone else would have been the equivalent of double dipping. However, you can bet that this is going to be an audit issue down the road for people whose accounting systems are not up to keeping costs separated.

If you or someone you know has received a Notice of Intent to Levy or has some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or via mail at jim@taxrepgainesville.com.

IRS ‘Math Fix’ Goes Too Far

One of the current problems at the IRS as pointed out by Tax Advocate Service’s 2018 Annual Report to Congress was the blurring of the lines of when has a tax return been audited vs. a math error correction. This is an important distinction. An audit comes with the right for judicial review plus numerous notifications while a math correction is an automatic assessment that just happens with only one letter.

There are 17 types of errors that the IRS considers to be math errors. Some of them have nothing to do with math and are errors in reporting ID numbers such as claiming a dependent and mistyping their social security number. The result is the disallowance of deductions and credits without the taxpayer having access to the processes that an audit would have allowed. Worse, the return is still eligible for additional assessments giving the IRS a second bite at the apple.

Allowing the IRS the ability to correct an obvious math error is a benefit for both the government and the taxpayer. It’s an efficient fix. But they are taking it way too far when they start making adjustments because some ID number does not match. Disallowing deductions for a child because the social security numbers do not match is not a math error. Maybe the deductions should be disallowed, but shortchanging the taxpayer’s rights for judicial review is not the right approach.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Three Ways to Deal with IRS Debt

You owe the IRS a lot of money. What can you do to get your life back on track? Basically, it comes down one of three options:

  • Convince the IRS that you are not in a position to pay
  • Make a deal to make monthly payments over a period of time
  • Make an Offer-in-Compromise in that the IRS will take some smaller amount and write off the debt balance.

Figuring out which of these three doors is the best option for you depends on your situation as defined by an IRS formula called the Reasonable Collection Potential or RCP. The RCP takes your monthly income and offsets that with “allowable” expenses to determine your disposable income (i.e., what you could pay the IRS monthly). This is the base line amount for negotiations with the IRS.

If your RCP is zero, then the IRS will check a box on your file as “Uncollectable” and go away for 18 to 24 months. They will revisit the case every couple of years until the Statute of Limitations expires at which time, they will write-off the balance.

If your RCP is a positive number, all is not lost. You can to some extent arrange your financial affairs so as to minimize the RCP calculation. Making these payments regularly usually means that the IRS will leave you alone until the Statute of Limitations date gets close. If a final check of your records does not show anything stupid like the purchase of Leer Jet, then they will likely write-off the balance.

Finally, there is the Offer-in-Compromise that is so famously shown on TV as “I only paid pennies on the dollar”. Frankly, that is hooey. Why would the organization with the most collection powers in the world just let someone go? The answer is that they don’t. Fully 80% of Offers are rejected by the IRS. The 20% that are accepted only happen because the taxpayer was able to demonstrate that this was the best deal that the IRS could expect to make.

There is a fourth option that makes sense in some cases – filing bankruptcy. The rules are a little complicated and you need to consider this with an experienced attorney who specializes in bankruptcy.

There are ways to navigate out of this mess. It takes a considerable amount of work to evaluate which is the best route to take.

“I Avoid IRS Hassles By Not Filing!”

Non-filers — folks who habitually decline to file Federal tax returns— fall into two broad categories:

  1. Those who have significant income withheld by an employer, and figure they don’t have to file because the IRS will probably owe them.
  2. Those that hope to fly under the radar for their entire lives.

The first group is actually kind of common. After all, maybe they will get around to getting caught up next month or next year. No big hurry, the IRS owes them. Right?

Wrong: The IRS seems to ignore them. In actuality, IRS computers have compiled all the W-2s and 1099s and calculated that the government is getting a free loan! But it can get even better for the Government! The statute of limitations will run 3 years after the due date of the return and the taxpayers will no longer be able to claim their refund.

Yea, free money for the government.

What about the second group, those guys that are flying so low that nary a ping hits the IRS monitors? If you live in a lean-to in the wilderness as a hunter-gather all your life, that will work. But for the rest of us, forget it. The IRS is getting better every year at searching through public databases looking for information on people making money and then checking their database of returns filed. It’s just not hard to see this software continuing to improve its ability to crawl through websites and matching information found with returns filed.

Bottom line – Getting by as a non-filer for your entire life is just not likely to work. Filing returns can be stressful for some, but it doesn’t hold a candle to the problems of dealing with IRS Collections people knocking on your door.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

Make Hay During IRS Pay Vacation

In response to the coronavirus pandemic, the IRS announced March 25 it was suspending most collection efforts including the requirement to make monthly payments on installment plans (You’ll need to contact your bank to suspend the payments through July. A phone call should do it). Further, no automated levies and liens will be initiated until July 15.  The IRS will also stop telling the State Department to suspend delinquent taxpayers’ passports.

This post is for those of us who have been paying (or plan to pay) our IRS tax debts, and coronavirus has messed-up our finances. So,  should we just chill — take the payment vacation, and watch Netflix?

(If you can’t pay or chip away at your tax debt in the foreseeable future, read about how to obtain uncollectable status.)

If You Must, Defer Your Payments

So. If you are truly strapped, with no light in sight yet, taking the payment vacation may be the lifeline you need to put food on the table! Just remember that the debt hasn’t gone away, it’s just dozing and July 15 is right around the (ahem) coroner. So, be ready to start paying again, AND, act now to renegotiate your payment amount or cut your tax debt.

Act During IRS Pause to Renegotiate Payment Plan or Prepare a Pay-Less Compromise Offer

If you have a large or unresolved tax debt or run a business affected by the nationwide shutdown, you must get cracking on a recovery plan. One opportunity is to renegotiate your IRS Payment Plan. After all — if your business is hurting,  even future cash flow may not support your current payment plan. You’ll have to submit a new Form 433-a to document your Post-COVID-19 financial reality.

Learn Your Reasonable Collection Potential

IRS uses Form 433 to gather future-income data from delinquent taxpayers. The data is used in a formula that yields a  Reasonable Collection Potential (RCP) —a future-earnings dollar value the tax agency expects it can collect.

As a tax representative, I employ the same RCP formula with proprietary software so my clients can know in advance what the IRS expects to collect, based on the latest form 433 data.  This can help you, as noted above, to establish or renegotiate a payment plan; or if feasible, to save major money by offering to settle your IRS tax debt for less than you owe.

IRs Accepts 40% of Compromise Offers

IRS calls such gambits ‘Offers-in-Compromise’ (OIC) and in 2018 rejected 60% of these offers.  The key to landing in the 40% of accepted OICs is an offer close to your RCP. There are other factors, including timing. Which brings us back to the value of filling out or updating your form 433 and determining your RCP now.

Wait, It gets even better!

Tweak Your Reasonable Collection Potential

Now, while you have the time, during this pause in IRS collections activity, you can actually Change (Lower) Your IRS Collection Potential, to save even more money by taking certain steps. My linked article has more details.

Have a Pending Compromise Offer? Modify It, As Needed, by July 15

Do you have a pending Offer-in-Compromise? You now have until July 15th to modify the offer and document changes the coronavirus shutdown is having on your business. Also, any payments that were due with the offer are suspended until July 15.

If you or someone you know needs help with an IRS or state tax issue, please feel free to contact me at either (352) 317-5692 or via email.

Pay Pennies for Dollars Owed?

You see ads on TV about the IRS accepting “pennies on the dollar” to clear a backlog of tax debts. It seems an easy answer to a big problem. But, “too good to be true, usually not true.”

Bad News on Offers-in-Compromise

IRS rejects 60% of compromise offers it gets, per the 2018 IRS Data Book. This makes sense. After all, why would an agency with more collection powers than Herod be willing to forgive debt?  IRS agents certainly don’t win awards for giving away money!

Good News on Offers-in-Compromise

The IRS does accept 40% of the Offers-in-Compromise. These are offers that they decided were in the Government’s best interest to accept. Meaning, that they ran the numbers and decided this was the max they could expect to collect from the taxpayer.

So, how do you tilt the pinball machine to make it more likely to be in the 40% accepted? It starts with running your numbers on potential future earnings with the same formula that the IRS uses. This is called the “Reasonable Collection Potential” formula which calculates your disposable income on a monthly basis. Whatever this amount is times the number of months left before the Statute of Limitations nulls the debt is where the IRS is going to start. To make it into the acceptance column, you must make it a better deal than just sticking with the status quo.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com

Can IRS Tag Your Boss, Friends, and Neighbors?

Can the IRS contact your friends, neighbors, and employer? This is the government, of course they can. But the tax law does require them to give you reasonable notice. So when should you worry about this taking place, and what does ‘reasonable’ mean?

The Ninth Circuit of the Court of Appeals recently ruled that it cannot be a generalized statement referring to third parties in the whole. Instead it must be a written notice that they plan to contact a specifically named party. The Court’s reasoning was that these contacts could be very detrimental to the taxpayer. First, the contact alone was an exception to the rule that your tax information was completely confidential. Secondly there was a possible or even probable negative impact on the taxpayer’s reputation that the IRS was making inquiries.

This is great news for people in California and Arizona who are in the Ninth Circuit’s area. But, what about us in Florida? It also looks like good news for us. The IRS is adopting changes that will give everybody reasonable notice. While the IRS policy book (aka Internal Revenue Manual) still reflects their old policy of only providing a general notice in Publication 1 – Your Rights as a Taxpayer, which they mail out in all audits. There was a new memorandum issued last July with an effective date of 8/15/19.  It requires IRS employees to provide written notice of who they intend to contact at least 45 days in advance.

This is a much-needed change. It allows you the option to provide the necessary documents so that the IRS does not need to contact your friends, customers, or employer.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.