100% Tax Penalty

[RONCHECH]

I Just Found Out Today That One Of My Small Business Corporation Clients Is Going Out Of Business And Hasn't Been Able To Pay The Payroll Taxes For The Last Six Months. They Will Continue To Pay Employees Until May 31st. The First Quarter 941 Form Is Due Today. Can The Taxpayer Designate That He Is Paying Only The Taxes That Were Withheld (the 100% Penalty Amount), Or Pay Nothing Now And Negotiate With The Irs After The Business Is Closed Down.

[jainen]

a weak position

>>Can The Taxpayer Designate That He Is Paying Only The Taxes That Were Withheld (the 100% Penalty Amount), Or Pay Nothing Now And Negotiate With The Irs After The Business Is Closed Down<<

Sure, he can do that, and the IRS can do whatever it wants to also. Since he continues to pay other obligations after failing to pay withheld and otherwise required taxes, he would seem to have a weak position.

[JoshinNC]

You pay 2 people first,

I Just Found Out Today That One Of My Small Business Corporation Clients Is Going Out Of Business And Hasn't Been Able To Pay The Payroll Taxes For The Last Six Months. They Will Continue To Pay Employees Until May 31st. The First Quarter 941 Form Is Due Today. Can The Taxpayer Designate That He Is Paying Only The Taxes That Were Withheld (the 100% Penalty Amount), Or Pay Nothing Now And Negotiate With The Irs After The Business Is Closed Down.

yourself and the IRS. Everyone else waits! I would advise my client to send as much as possible to the IRS, even if it means not paying his/her mortgage, light bill, health insurance, whatever. I've been working a trust fund recovery case for over 2 years and my client has paid me in excess of $30,000 to do it. These aren't cheap and the IRS doesn't play around.

[New York Enrolled Agent]

Ronchech

Your plan is correct. Contrary to what was posted the IRS will follow the directions on DESIGNATED payements. See IRM 5.1.2.3 & 5.1.2.3.1 and Rev Procedure 2002-26.

You must place a restrictive endorsement on the back of the check. Use wording such as "Direct to the trust fund portion of taxes only for the period ended _____ for XYZ Corporation." The Courts have held that a designation made contemporaneously with the payment must be applied toward the trust fund portion.

Rev Proc 2002-26 is quite clear and it superseded Rev Rulings from prior periods.

[JohnH]

I was asked a question about the restrictive endorsement for trust fund taxes recently and came back to this forum to revive this discussion. Would it be sensible to assume that if a corporate taxpayer designates a payment to trust fund taxes, this serves as a red flag to IRS that there is a risk of collection and they might accelerate collection efforts? Or is this routinely done and they just process the payment in the same manner as any other payment on a delinquent account?

[DaveO]

Restrictive Endorsement

I agree that the IRS must follow the instructions. If the company is headed for bankruptcy then the restrictive endorsment makes a lot of sense. Only the trust fund portion of the taxes will survive a corporate bankruptcy. Penalty and interest will be discharged if funds are not available to pay.

[JohnH]

Thanks fo the reply. The question came up with respect to a company which has ongoing operations, is currently in compliance for a period of over 2 years, and APPEARS to be able to survive the assesment of unpaid payroll taxes, penalties & interest from the 3rd & 4th preceding year if it can buy a little time.

However, since nothing in life is guaranteed, the question arose about whether the restrictive endorsement should be used as further insurance for the responsible parties just in case things don't work out as expected.

On the one hand, it seems like a smart thing to do as a precaution while grinding out the remaining amounts due. On the other hand, it might be construed as waving a red flag in front of a bull, potentially causing IRS to bring the hammer down faster. So, knowing there is probably no absolute right or wrong answer, which way should the judgement call fall?

[DaveO]

Survival of the Client comes first

If this strategy is part of an overall plan to insure the survival of the company then you gotta do what you gotta do. Many companies go through some tough times and get back on track. Other companies are forever behind on their obligations. I have clients in both camps and the ones who are behind are getting more attention than ever.

Is some short term borrowing a possibility? The penalty and interest the IRS charges makes the credit card companies look good in comparison. Paying a 10% to 15% penalty for being a month or two late is pretty severe.

Will it raise a red flag? Probably, but if your client has a good payment history then they may not commence more agressive collections action right away.

[Nashville]

Trust Fund only

I believe the IRS still has the golden sceptre to apply payments in whatever manner they choose, so long as the trust fund is honored first.

There is a consensus that money withheld from innocent employees is entitled to a sacrosanct position, and that the IRS application to penalties and interest should not take priority over first making the employees' deductions well. Even some within the IRS feel this way. Don't know how this would shake out if the officers' themselves were the only employees.

[geekgirldany]

I've got a customer with that owes payroll taxes from 01 and 02. She has been current since 03. With penalties, interest and actual tax it is over $115,000. While owing this she has bought new equipment, moved, and gained more employees. I've told her over and over again to get a loan and pay it off. Just won't do it. Every time I call the IRS about something else regarding her taxes they always ask what bank she uses and she must contact them asap. Never does.... I shutter to think what may happen.

[JON]

Directed to trust fund

has to have limited use. Can you also say what quarter? Bankruptcy has to close otherwise what use. If you are paying anything else but salaries IRS is not going to take a 2nd or a 3rd position. May work if company is closing down or in bankruptcy.

[JohnH]

Good discussion, all. Thanks for the varied input.

Incidentally, some day I'm going to run an actual analysis of the true cost of not paying payroll taxes. It is high, and certainly not recommended for a host of reasons other than the cost of the money. However, my first impression is that the net cost actually begins to ratchet down slightly at about the 3-year mark. This is because the FTF and FTD penalties max out, with only the FTP penalty and interest continuing to run indefinitely. Looks like a simple calculation puts the cost in the first couple of years averaging about 19-22% APR, and then it begins to fall down to about 17%.

When you factor in some assumptions about compounding, the effective APR is more like 14-15%. You then need to consider that penalties are non-deductible, which begins to drive the after-tax cost back up. However, if you take into account that some credit cards charge 23% or so for their worst customers, and that someone who is late in paying their payroll taxes probably already has other credit problems, the cost isn't quite as onerous as it first appears.

I'm not recommending non-payment of withholding taxes as a business strategy, but if someone is in that hole they are infinitely better off paying the current taxes and tyring to drag out the old liabilities. This all assumes that the entity has a chance of survival inthe first place.

[Nashville]

Amazing

Amazing how something like this falls through the cracks. Rather appalling when obviously your client has the wherewithal to pay this. It would also add credibility to what we tell them, because we are often ignored and scoffed at when suggesting that our clients pay up before buying an Escalante.

IRS could actually levy this if they would just go to the trouble of doing it. They would rather spend their resources programming their computers to generate more notices and calculate more penalties and interest.

I believe the essence of the conversations above mean that if IRS has taken any money for the employee's portion of the 2001, 2002 taxes, they must apply that money to that portion first before applying any of it to penalty and interest.

[OtisMozzetti]

Do &quot;innocent employees&quot; lose if trust fund not yet collected?

There is a consensus that money withheld from innocent employees is entitled to a sacrosanct position, and that the IRS application to penalties and interest should not take priority over first making the employees' deductions well. Even some within the IRS feel this way. Don't know how this would shake out if the officers' themselves were the only employees.

May I please ask a related question, a question that many of you probably already know how to answer:

If the IRS has never collected, at least not yet, the payroll taxes trust fund monies from any of the responsible parties, does that mean that the innocent employees (other than those deemed responsible parties) lose credit for their income tax withholding, Social Security withholding, etc.? Or is it the government which is holding the bag until the trust fund monies will probably someday be collected from among the responsible persons?

[StevetheEA]

I was asked a question about the restrictive endorsement for trust fund taxes recently and came back to this forum to revive this discussion. Would it be sensible to assume that if a corporate taxpayer designates a payment to trust fund taxes, this serves as a red flag to IRS that there is a risk of collection and they might accelerate collection efforts? Or is this routinely done and they just process the payment in the same manner as any other payment on a delinquent account?

You don't need a Restrictive Endorsement to accelerate collection efforts - the fact that this is a Payroll tax matter accelerates the collection efforts automatically.

Even if the owners of the Corporation are the Responsible parties (look at Form 4180 to see what the IRS will be looking for), they will still be held responsible for the Trust Fund portion of the taxes owed. ANY payments made voluntarily can be directed by the taxpayer and should be notated as both a Restrictive Endorsement and with an accompanying cover letter. Never underestimate the power of the IRS to misapply payments "in the interests of the Government".