Payroll Mess Beyond Belief

[TXEA]

This is a long drawn out issue, but here is my basic question relative to a new client (local attorney referral:

Taxpayer has not withheld payroll taxes or FIT from employees for four straight years....no reports, no W-2's, no 1099's. Payroll averages 40,000 per quarter. All of these people are employees, and I am sure none have included any of the income on their Forms 1040 since 2011.

I can not get anyone at IRS to answer a call. My immediate issue is to get 2014 in compliance. How would handle the 2014 payroll? Would you gross up the wages since employer will have no chance of collection from employees and show no FITW? File the 941, 940, state unemployment, and W2's based on this calculation.

I know the IRS has voluntary compliance programs for this situation; however, I have two problems for 2014. Number one, you have to have permission to use the VCP rates and, there is no time to get permission in the next 22 days. Finally, VCP is generally limited to taxpayers not under audit "by any state agency". Well, the state unemployment tax agency is auditing them.

What would you do for 2011, 2012, and 2013? Voluntary Disclosure and see what happens?

BTW, the owner is very unsophisticated and hired someone to take care of these issues, and I really believe he had no idea.

[ATSMAN]

Which years is the state auditing?

[TXEA]

They audit covers the period of 2012 - 2014.

[BOB W]

Grossing up is part of the penalty. In the past federal and state taxes needed to be part of the gross-up. T/P will owe mega bucks plus penalties and interest.

Are you being hired by the attorney? If not, you should be and let the Attorney negotiate with the IRS and STATE agency. As always get your fees up front as there will be a lack of cash in this business very quickly.

[TXEA]

Bob, if the client qualifies for IRC 3509(b) rates (which they might) then the penalty rates do not result in a gross up, and the IRS collects the SS and Medicare Tax from the employee. I am just not certain that the employer will qualify for these rates.

Basically, the employer pays an extra rate for penalty on the FICA rates and FIT rate penalty based on the wages.

[BOB W]

So, voluntary filing of 941s and state reports should only be fica and med withholding? Thus taking a chance they will qualify for IRC 3509(b) rates? Ok, but I would let the Attorney make that choice since he has to defend all filings/none filings.


added: Since IRS is not auditing, they should be notified of the non-filing to get IRC 3509(b) rates?

[TXEA]

Bob, I have always understood that to use the 3509(a) or 3509(b) rates that the taxpayer has to have approval from the IRS.

As for 2014, I really don't know what to do other than gross up the amounts for the SS and Med Tax paid by the employer for the employee.