This is the craziest thing!

[TaxBird]

I have a client who has had ongoing payroll tax issues (since at least 2002). While we were busy correcting the 2002 mess (in late 2004/early 2005) the IRS decides to nab, without notification to TP, 4 941 payments and send them to never, never land ('Excess Collections Department").

This went unnoticed by TP until the notices started coming in for that year. It took a ton of digging to figure out that while the $$ went to the IRS, the IRS didn't apply it anywhere.

We got that straightened out (8 weeks to get it out of never, never land) and now the IRS wants to hit my client with late penalties on those payments.

While I'm confident that we can get some of that abated, I never cease to be amazed at the ways the IRS keeps me billable. I should put them on my Christmas card list!

[Golden Rocket]

Asking for it

Your point is well made Tax Bird, but your client placed himself into the loving arms of the IRS system by being late.

Some years ago the IRS announced that it was going to enforce the right to apply 941 payments to the "oldest employer liability" but left open the possibility of applying it to any such liability as they saw fit. That means they have the right, for example, to apply to the trust portion of the liability before ANY remaining liability regardless of age.

And if I were you, I would charge my normal fee for cleaning up this apparent botched application by the IRS. More cost to the client.

Sounds like your client is like some of mine. I try to impress the following:
1) Most of the money you think you are paying for 941 deposits is not YOUR
money, and never was. It was withheld from your employees who work for
you at an agreed-upon rate. Only the matching portion of SS/Med is "your"
tax. Don't try to use your employee's tax money for your own operations.
2) Late deposits, non-deposits, etc. may tempt you, but you have only a few
months to enjoy it. The end result will be the IRS moving into your spare
bedroom.

In spite of this, it's like some customers are listening to the serpent in the garden
tell them, "Ye shall not surely die."

[TaxBird]

Your point is well made Tax Bird, but your client placed himself into the loving arms of the IRS system by being late.

Some years ago the IRS announced that it was going to enforce the right to apply 941 payments to the "oldest employer liability" but left open the possibility of applying it to any such liability as they saw fit. That means they have the right, for example, to apply to the trust portion of the liability before ANY remaining liability regardless of age.

This is true. But in this case, the IRS took the $$, didn't apply it anywhere, and didn't notify the TP that it had done so. Can you Imagine!

And if I were you, I would charge my normal fee for cleaning up this apparent botched application by the IRS. More cost to the client.

I usually charge my 'specialist' fee in cases like this. Too many years of shenanigans with this client.

Sounds like your client is like some of mine. I try to impress the following:
1) Most of the money you think you are paying for 941 deposits is not YOUR
money, and never was. It was withheld from your employees who work for
you at an agreed-upon rate. Only the matching portion of SS/Med is "your"
tax. Don't try to use your employee's tax money for your own operations.
2) Late deposits, non-deposits, etc. may tempt you, but you have only a few
months to enjoy it. The end result will be the IRS moving into your spare
bedroom.

In spite of this, it's like some customers are listening to the serpent in the garden
tell them, "Ye shall not surely die."

So true. Yet it seems all they hear is '...blah, blah, blah, your money, blah, blah, blah'. Kinda like how when Marge talks to Homer, all Homer hears is '...blah, blah, blah, dooooo-nuts".

Same kind of glazed look.

[TaxBird]

Update

snip
Sounds like your client is like some of mine. I try to impress the following:
1) Most of the money you think you are paying for 941 deposits is not YOUR
money, and never was. It was withheld from your employees who work for
you at an agreed-upon rate. Only the matching portion of SS/Med is "your"
tax. Don't try to use your employee's tax money for your own operations.
2) Late deposits, non-deposits, etc. may tempt you, but you have only a few
months to enjoy it. The end result will be the IRS moving into your spare
bedroom.

In spite of this, it's like some customers are listening to the serpent in the garden
tell them, "Ye shall not surely die."

When this notice came in (the one that started the thread), I got an email from the client asking me to tell him how much he owed. When I replied that he owed the principal portion 'for sure' and most likely the penalties as well (abatement not likely given his history), he asked me "can I make a payment plan?"

My response:

"No.

Payment of payroll taxes are considered a 'fiduciary responsibility'. As the employer, you are responsible for collecting and paying payroll taxes on behalf of the employees. Since the majority of the payroll taxes come from the employees (employer only contributes 1/2 of the FICA - 7.65%), the IRS expects that you are safeguarding that $$ on behalf of the employee - not spending it on other things. So it's not a good idea to tell them now that you don't have it.

What you do is, pay what you can, as fast as you can, until it's paid off.

However, please note that not paying that principal part now almost ensures they won't abate....and the interest will continue to accrue until it's paid off."

His response: I'll have the $$ next week.

Can you imagine? (again)

Between all the shenanigans, he's spent more overall (between my fees and IRS P&I) than if he would have just paid the $$ when due. The gamesmanship is what boggles.

It never ceases to amaze me.

[JohnH]

Payment Plans Are Routinely Approved

Not disagreeing with what you say with respect to the fact that it isn't the employer's money, but I don't think you were correct when you told the client he could not set up a payment plan.

The IRS routinely approves payment plan requests even for payroll tax liabilities. They don't distinguish between the trust fund portion of the taxes vs the employer portion until/unless the taxpayer gets into a trust fund penalty situation. I've been surprised at how cooperative they are at times. The guidelines are the same as for income tax payment plans. Once the outstanding balance is reduced considerably toward then end of the payment plan, it's even possible to request a penalty abatement and the chances of approval are pretty good IF there is was anywhere near a valid reason at the outset.

[TaxBird]

Really!

Not disagreeing with what you say with respect to the fact that it isn't the employer's money, but I don't think you were correct when you told the client he could not set up a payment plan.

The IRS routinely approves payment plan requests even for payroll tax liabilities. They don't distinguish between the trust fund portion of the taxes vs the employer portion until/unless the taxpayer gets into a trust fund penalty situation. I've been surprised at how cooperative they are at times. The guidelines are the same as for income tax payment plans. Once the outstanding balance is reduced considerably toward then end of the payment plan, it's even possible to request a penalty abatement and the chances of approval are pretty good IF there is was anywhere near a valid reason at the outset.

I searched the IRS website and could only find reference to installment agreements for income taxes. I used "installment plan" and "payment plan" as seach criteria. Maybe I needed to use other search criteria?

You wouldn't happen to have a cite or url, would you?

Thank you regardless.

[JohnH]

No cites, but...

I don't have any cites for you, but I have seen it work before. The most recent one I prepared was back in Feb, 07. It was a corporation which owed payroll taxes for separate quarters in 2003 & 2004. I used Form 433-D and entered "Form 941" in the box for "Kinds of Taxes". Amount due was about $9K and the proposal was for $400 / month via bank draft. It was approved. I'll bail out on the client if they don't live up to the agreement, but so far it's being paid regularly.

I've used 433-D before and I think they generally accept them if the amount is under $25K and the repayment period is under 5 years. Plus they probably check to be sure there aren't other delinquencies before approving the request, just to be sure problems aren't piling up. Obviously if the client owes over $25K it would be wise for them to try and get the balance due under that figure before making the request - no guarantee that it will work but it's worth a try if they don't have the funds to pay it all.

Some taxpayers are just chronic late-payers/non-payers and will never change - I don't have any sympathy for them. But others make a mistake or series of errors of judgement and get themselves in a cycle where they are so pressed to try and cover delinquent payroll reports that they can't pay the current taxes. Thus they are continually racking up new rounds of FTF & FTP penatlies as the rob from Peter to pay Paul by constantly late-filing or late paying the most recent taxes because the wolf is always at the door. For someone in that situaiton who is serious about getting out, a payment arrangement can get them over the hump. It locks in the delinquent amount due at an effective interest rate of about 14% (becuase the FTF penalties max out at 25% and just become a part of the principal) and enables them to file & pay current taxes in a timely manner.

It's an expensive way to handle things, but if they don't have any other viable financial resources and a business that is basically profitable, it can be an acceptable strategy to work out of the problem & stop the vicious cycle. The 14% effective rate is an average based on an 8% interest rate plus a montlhy 1/2 of 1% FTP penalty, which equates to about 6% annually). It's higher than an unsecured bank loan but less than the 18-24% credit cards charge to their less-credit-worthy borrowers. I assume that a client whose credit situation won't allow him to borrow the money on an unsecured bank loan or other favorable rates would only have the high-interest option open to him. I wouldn't encourage someone to take this route as a business planning tool, but as accountants we generally don't see them in the planning stage - we see them after the damage has already been done.

[ED SMITH]

IRS Manual

This might help:

http://www.irs.gov/irm/part5/ch14s07.html

[oceanlovin'ea]

IRS is getting tougher

A couple of months ago when I made payments via EFTPS for a couple of my clients, I made them on the 14th around 10PM. I didn't realize that there was a cutoff time for payments so the payments posted on the 16th instead of the 15th.

They all got notices for being 1 day late with penalties. That was ridiculous I thought. The notice went to the TP and they just paid the penalty.

Now I set up the payments early in the month and just set them up to post on the due date.

I think their systems are more automated this year and notices are going out automatically on anything that is not dated correctly.So we have to be very careful.

Linda F

[TaxBird]

I don't have any cites for you, but I have seen it work before. The most recent one I prepared was back in Feb, 07. It was a corporation which owed payroll taxes for separate quarters in 2003 & 2004. I used Form 433-D and entered "Form 941" in the box for "Kinds of Taxes". Amount due was about $9K and the proposal was for $400 / month via bank draft. It was approved. I'll bail out on the client if they don't live up to the agreement, but so far it's being paid regularly.

I've used 433-D before and I think they generally accept them if the amount is under $25K and the repayment period is under 5 years. Plus they probably check to be sure there aren't other delinquencies before approving the request, just to be sure problems aren't piling up. Obviously if the client owes over $25K it would be wise for them to try and get the balance due under that figure before making the request - no guarantee that it will work but it's worth a try if they don't have the funds to pay it all.

Some taxpayers are just chronic late-payers/non-payers and will never change - I don't have any sympathy for them. But others make a mistake or series of errors of judgement and get themselves in a cycle where they are so pressed to try and cover delinquent payroll reports that they can't pay the current taxes. Thus they are continually racking up new rounds of FTF & FTP penatlies as the rob from Peter to pay Paul by constantly late-filing or late paying the most recent taxes because the wolf is always at the door. For someone in that situaiton who is serious about getting out, a payment arrangement can get them over the hump. It locks in the delinquent amount due at an effective interest rate of about 14% (becuase the FTF penalties max out at 25% and just become a part of the principal) and enables them to file & pay current taxes in a timely manner.

It's an expensive way to handle things, but if they don't have any other viable financial resources and a business that is basically profitable, it can be an acceptable strategy to work out of the problem & stop the vicious cycle. The 14% effective rate is an average based on an 8% interest rate plus a montlhy 1/2 of 1% FTP penalty, which equates to about 6% annually). It's higher than an unsecured bank loan but less than the 18-24% credit cards charge to their less-credit-worthy borrowers. I assume that a client whose credit situation won't allow him to borrow the money on an unsecured bank loan or other favorable rates would only have the high-interest option open to him. I wouldn't encourage someone to take this route as a business planning tool, but as accountants we generally don't see them in the planning stage - we see them after the damage has already been done.

Thanks JohnH! This is good information to know.

Unfortunately the amount owed is ~$100K ($75K principal & $25K interest) so it doesn't sound like this will work for him. But it's good to know regardless.

For this guy it's a matter of priorities. He has the money just doesn't want to pay it. Like you, I have little sympathy for him.

[TaxBird]

This might help:

http://www.irs.gov/irm/part5/ch14s07.html

Thank you Ed. I had forgottten about the manual.

Section 4C is particularly applicable: if taxpayers are in business, are currently pyramiding trust fund taxes, and have three or more trust fund balances due assigned to the collection field function, then they are considered "repeaters. " These taxpayers may not — immediately — be granted installment agreements. Installment agreement requests received from these taxpayers should be identified as pending (see IRM 5.14.1.3(5).

I've advised him before that he has to get on better standing if he is to reasonably expect any 'sympathy' from the IRS.

[Jiggers]

Don't they all hate to pay the IRS!!!

For this guy it's a matter of priorities. He has the money just doesn't want to pay it. Like you, I have little sympathy for him.

I think we all have encountered these type of clients. Over the years I have developed a hard-nosed approach when dealing with them.

I had one of those that was always late with his payroll tax deposits, wouldn't make his quarterly 1040 payments, and was never paying the balance due on his tax returns. I really tried to help this poor fellow, my ex-friend, trying to keep the IRS off of his back. However, he started to get delinquent with paying my monthly bill, plus the IRS. I was doing his monthly bookkeeping work and when I started finding lots of personal expenses with this new young wife of his instead of paying me and the IRS, I dropped him like a hot potato. He was buying 4-wheelers, jet skis, and a $10,000 engagement ring. All paid with cash. He was in debt up to his ears and was always trying to refinance his bank loans.

This wasn't the only client like this.