Delinquent Return - Accrued Payroll Related Exp

[JohnH]

Taxpayer is a "C" corp filing on the accrual basis. They failed to file the 2001 and 2002 forms 1120, and now we've discovered they also failed to pay some payroll taxes. (The plot thickens).

The unpaid payroll taxes are now being paid (you should see those penalty notices!) and we are preparing the 2001 & 2002 income tax returns. Since they are an accrual basis taxpayer, it seems they should be able to deduct the unpaid withholding & payroll taxes on the year on which the wages were paid and the tax liability accrued.

The penalties are not deductible, but does anyone know any reason we can't deduct also the interest accrued on the unpaid taxes on the 2001 & 2002 returns? The interest wasn't actually assesed at the time, but it can be easily calculated as of Dec 31 of each year, and now that we have the P&I notes in hand our calculations can be verified.

[Roland Slugg]

Accrue

Yes. If the corporation uses the full accrual method of accounting, it may (and should) accrue the interest accumulated on the unpaid payroll tax liability. Only accrue the interest accumulated as of the end of each year. It should also record as an accrued expense the employer's share of the payroll taxes themselves.

But what was done when the 2003, 2004, 2005, 2006 and 2007 returns were filed ... if, in fact, they were filed at all? Were the payroll taxes and accrued interest reported on those returns?

[JohnH]

I wasn't being cagey, just wanted to get the basic question answered at first. Thanks for bringing up the other years.

The taxpayer was trying to get back into compliance, so the 2005 & 2006 returns were filed without a balance sheet. 2007 is on extension and we are trying to get everything up to par before Sep 15.

1999 showed a profit and 2000 showed a loss but the tax preparer did nothing with the loss from 2000 and he didn't check the box to elect to carry it forward.. So after all the dust settled, the 2001 loss is partly lost due to having to reduce it by the carryback which should have been taken against 1999. This leaves some loss carryforward from 2001 and quite a bit for 2002, which can be used to offset most of the 2003 profit. Therefore it's important to recognize as much loss as possible in 2001 and 2002 in order to reduce or eliminate the 2003 profit. This means that 2004 is probably the only year in question which will show a profit.

It seems like a mess and I'm sure the math is going to be somewhat challenging, but the game plan is pretty well laid out. I just wanted some confirmation that it was reasonable to accrue the unpaid withholding & payroll taxes and especially the interest.

[Snaggletooth]

Fly in the Ointment

Two very scholarly and respected board members are conducting a discussion about whether to accrue payroll taxes and interest.

I'm going to be odd-man-out on this one, and won't pretend to know as much as these gentlemen. But I'll go out on a limb and appreciate knowing where I wrong, if indeed I am.

What about the deduction for accrued expenses which are not paid by the due date of the return, or alternatively in the "regular course of business." Especially interest, where IRS has gone to extra lengths to prevent deductions when interest has been recognized but not paid.

I do think this should be accrued expense but should be carried as book-to-tax differences. These expenses are not paid by the due date of the return, nor in the regular course of business.

[Roland Slugg]

What about the deduction for accrued expenses which are not paid by the due date of the return?

Is there such a general rule? The only specific rules I'm aware of are the ones regarding accrued charitable contributions by corporations and accrued vacation pay by all taxpayers. In these two cases the accrued expense, in order to be deductible on a given year's return, must be paid within 2½ months after year-end. Of course, there is also the rule prohibiting the deduction (until paid) of accrued rent, interest, wages and other expenses payable by an accrual basis taxpayer to a related cash basis taxpayer.

[JohnH]

You both touched on the only thing I'm aware of - the prohibition of the deduction of accrued payments due to a related cash-basis taxpayer. Part (but not all) of the wages were paid to a related party, so that might present a problem if IRS wants to get sticky about it. Other than that, I don't think the 2-1/2 month rule applies in this case.

Even then, I'm still inclined to think the interest due on the unpaid taxes would be deductible in full. It's a fixed and determinable amount and can be easliy calculated as of 12/31; it's just a matter of looking up the rate on a table and running the numbers. The absence of a bill from IRS at the time doesn't affect that fact that the interest was a legitimate debt.

The only other thing I can think of is the 10% reduction of the deduction for the FUTA because it was paid late,