What to Expect When You Owe Back Payroll Taxes

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DARRIN T.  MISH: Hello, this is the IRS Solution Attorney, Darrin T. Mish.

KATRINA MADEWELL: I’m your co-host, Katrina Madewell. Happy Thursday!

DARRIN T.  MISH: Happy Thursday. It’s been rainy here and it’s been hard to complain considering what the people in Houston are going through.

KATRINA MADEWELL: You can’t complain.

DARRIN T.  MISH: It’s nice, bright, and shiny and wonderful outside. I could almost see a cold front on the horizon. Almost.

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KATRINA MADEWELL: I’ve been watching some of the posts from my friends that are a little bit up north, like Atlanta and they’re talking about the crisp air that’s starting to roll in. That’s how I know fall is sort of around the corner.

DARRIN T.  MISH: You know how you know it’s crisp in the Tampa Bay area, it’s when you don’t have to use your windshield wipers on a clear day all the way to work. That’s how you know it’s getting crisp.

KATRINA MADEWELL: It occurred to me yesterday, Pat, he gets really happy when he sees us at the end of the week, especially me on Friday because he knows it’s the last day. It occurred to me that our listeners are probably happy to hear us too, because it’s the end of the week.

DARRIN T.  MISH: That’s true. Thursday’s not a bad day. Friday’s a little better. Friday’s my favorite day of the week. it’s the anticipation of all the things that are going to happen on the weekend.

KATRINA MADEWELL: No, I will not switch Tampa Home Talk Friday with you. The traffic is way better.

DARRIN T.  MISH: That’s ok. I don’t want to do it on Friday mornings. Thursday morning, I’m good with my slot and I hope everyone is listening is good with our slot as well.

KATRINA MADEWELL: I think so too. I’ll take feedback if you have an idea for a show. I’m always pushing ideas over to you.

DARRIN T.  MISH: Absolutely.

KATRINA MADEWELL: They’re usually house related.

DARRIN T.  MISH: Imagine the real estate gal wants to talk about housing.

KATRINA MADEWELL: Houses and you want to talk about tax stuff. What IRS Secrets do you have for us today?

DARRIN T.  MISH: It’s debatable on whether I want to talk about tax stuff or not. Here we are today. We’re going to talk about payroll taxes. We almost never talk about payroll taxes on the show.

KATRINA MADEWELL: I don’t like to talk about payroll taxes.

DARRIN T.  MISH: I don’t get to be as heroic. Not that I call myself a hero, but I don’t get to do almost magical things.

KATRINA MADEWELL: There isn’t a lot of wiggle room with those kinds of taxes, is there?

DARRIN T.  MISH: My role changes when it comes to payroll taxes. When I help clients with 1040 taxes, personal income tax issues, sometimes we can cut deals. We can do offers in compromise.

KATRINA MADEWELL: That’s all the time.

DARRIN T.  MISH: We do quite a bit of that. We can cut deals, there are things we can do. Sometimes the statutes of limitation run out. Sometimes there’s quasi-magic that can happen. Payroll taxes, not so much. The government is a lot more serious about collecting payroll tax, for some reasons we’ll explain in a little bit. They’re a lot more focused on the payroll cases than they are in the income tax cases. One of the reasons is payroll taxes can spiral out of control very fast.

KATRINA MADEWELL: You can get a revenue officer at your door fast for that one.

DARRIN T.  MISH: I was talking to a gentleman yesterday, I forget how many employees he has, let’s call it 50 employees. Their payroll tax obligations for a quarter are around $80,000. How many quarters do you need to be behind before you’re talking real money?

KATRINA MADEWELL: That’s quite a few employees there.

DARRIN T.  MISH: If you’re falling behind at the rate of $80,000 a quarter and you’re talking about a year or so, you’re talking about real money right away.

KATRINA MADEWELL: That would scare the daylights out of me. I can not even tell you. As much as it would suck to let people go, I would have to do that.

DARRIN T.  MISH: Sometimes that’s the right choice. When I was talking to this gentleman yesterday, and it’s obviously confidential who it is. When he came in, he wasn’t feeling very confident because we’re talking about a lot of money. By the time he left, we devised a plan and strategy and I think he’s feeling a lot more comfortable. My role changes…

KATRINA MADEWELL: What’s your plan or strategy if they owe that kind of money? How do you fix that?

DARRIN T.  MISH: In that case, I’m not going to disclose what we’re going to do because it has unique circumstances that I don’t want, if there was somebody from the IRS listening, I don’t want them to know what we did.

My role is a little different in payroll cases. What I’m aiming for in the payroll cases is I’m sort of the liaison between the taxpayer and the IRS so that the taxpayer knows they’re getting good information.

KATRINA MADEWELL: And they don’t say anything stupid.

DARRIN T.  MISH: I’m also the protector to a limited extent. My role is to protect them from anything really tragic from happening. Catastrophic and getting the business shut down versus striking a great day.

KATRINA MADEWELL: Traditionally speaking, that’s what people think attorneys do. They protect them from the unknown because you guys know the rules. The problem is there’s so much information online and it’s not all accurate.

DARRIN T.  MISH: One of the things people also want that I’ve learned over the years, is they want us to look into the crystal ball, using our experience and kind of predict what’s going to happen. When you’re younger and less experienced, that’s challenging. You don’t have a crystal ball because you don’t have this career of experience to deal with.

KATRINA MADEWELL: It can go a few different ways but I’m sure it’s never the same for every scenario.

DARRIN T.  MISH: I’ve gotten pretty good at predicting what’s going to happen. If we do “this”, then that’s going to happen, if we do “that” then that’s going to happen. I think people value that. Sometimes they don’t like the prediction.

KATRINA MADEWELL: It’s better than the fear of the unknown.

DARRIN T.  MISH: I would submit you’re correct in that respect.

KATRINA MADEWELL: I think most people would agree with that. Wouldn’t you, Pat?

DARRIN T.  MISH: What do you do if you haven’t paid payroll taxes in awhile?

KATRINA MADEWELL: What’s awhile?

DARRIN T.  MISH: I would say more than one quarter.

KATRINA MADEWELL: More than one quarter, wow. That wasn’t the answer I was expecting.

DARRIN T.  MISH: You were thinking it was going to be a lot longer.

KATRINA MADEWELL: Yes, I was.

DARRIN T.  MISH: It depends on the size of your business, too. If your quarterly obligation is $4,000…

KATRINA MADEWELL: If you have a huge chunk that the IRS is expecting and you didn’t pay in three months.

DARRIN T.  MISH: I would say if you’re more than a quarter behind, you should be listening to what we’re talking about here. It depends on if you have a revenue officer involved in the case or not.

KATRINA MADEWELL: That’s what I was going to say, what happens when that happens?

DARRIN T.  MISH: If you have a revenue officer involved in the case, everything accelerates. Time compresses, everything happens a lot faster.

KATRINA MADEWELL: How do you fix that quickly? Should you hire an attorney at that point? Any pointers we can give somebody?

DARRIN T.  MISH: If a revenue officer is assigned to your case and you have a payroll tax problem, it’s going to get scary real fast. Not necessarily bad things are going to happen. I’m not a guy that tries to go out there and put a bunch of fear into the world.

KATRINA MADEWELL: It’s not like some dormant tax situation where you haven’t filed in years and nothing has happened.

DARRIN T.  MISH: They’re going to knock on your door, they’re going to put you on the spot, and they’re going to freak you out. it’s human nature.

KATRINA MADEWELL: Been there, done that. Started my business at age 23, it totally happened to me and it sucked. I was pregnant.

DARRIN T.  MISH: If you’re human, you’re going to get anxious and you’re going to get scared, and you might even say things you don’t mean to. Not bad things, but you might…

KATRINA MADEWELL: I didn’t know you back then and I thank God every day that I got the female revenue officer that I think took pity on me.

DARRIN T.  MISH: The story goes, you were pregnant and you were young and it was about timing.

KATRINA MADEWELL: I had a partner that bailed on me. Ran off the bookkeeper, I had no idea the payroll taxes weren’t being paid. Didn’t even know.

DARRIN T.  MISH: I like to say this, it’s partly the IRS’s fault that these payroll tax problems get big so fast. The reason is, even though I just gave the adiv3e, if you’re more than one quarter behind, you should be listening to us. What happens in practical terms is it can take several quarters before anybody at the IRS even notices and then before anyone at the IRS has time to come out and respond.

You might get some letters that increase in severity and threatening language, but the IRS is probably not going to send a revenue officer out to the business for a year,  year and a half, five years.

KATRINA MADEWELL: I don’t think it was that long in my case.

DARRIN T.  MISH: It kind of depends on staffing. How staffing is going, it ebbs and flows. So the IRS is low on the staffing levels right now and their funding is lower than ever for political reasons.

KATRINA MADEWELL: For political reasons.

DARRIN T.  MISH: I’m not picking on anybody there, it just is what it is. They have fewer people to come out and deal with these cases. I’ll give you some perspective. It changes nationally, it’s not even either. Here’s what I mean. In Tampa, FL, in the Tampa Bay area, you might have a revenue officer if you owe $50,000-$100,000 in payroll taxes. In Texas, it takes more than half a million.

KATRINA MADEWELL: Really?

DARRIN T.  MISH: There’s a lot more money in Texas.

KATRINA MADEWELL: Land in Texas.

DARRIN T.  MISH: The gross product of the economic activity in Texas is higher than it is in Florida. They just don’t have the people to go knock on the doors. I have a case in Texas, payroll case, for several years. I think it was a half million dollars or so. I never heard from them. We were trying to get current and couldn’t get it done.

KATRINA MADEWELL: I think about this from the flip side, like from the revenue officer’s standpoint. I don’t know I would want to go knock on doors, I just don’t know I would want that job, ever.

DARRIN T.  MISH: Brief shout out to the revenue officers. That’s a scary job.

KATRINA MADEWELL: Don’t they carry? Don’t they? Are they allowed?

DARRIN T.  MISH: No. They’re not law enforcement officers, they’re for a lack of a better term and I don’t mean to be pejorative, they’re bureaucrats.

KATRINA MADEWELL: If they had their concealed carry, they’re technically at work so they couldn’t.

DARRIN T.  MISH: As far as I know, the federal government is not going to let them carry a concealed firearm.

KATRINA MADEWELL: That was a female that came to my office.

DARRIN T.  MISH: I don’t think it’s as scary for them to go to businesses and make those contacts, but people’s homes?

PAT GEORGE: They carry a credit card machine.

DARRIN T.  MISH: They do carry a plastic badge. A crime committed against a federal officer is a big deal. that doesn’t mean there aren’t crazy people out there who don’t think about it.

KATRINA MADEWELL: They’re still people with families that want to go home.

DARRIN T.  MISH: We don’t wish any harm on them, they’re just doing their job and somebody has to do it.

KATRINA MADEWELL: When people are scared, they do crazy things.

DARRIN T.  MISH: When we come back, we’ll get into more details about why payroll taxes are so serious.

KATRINA MADEWELL: And what to do if you can’t afford to pay them.

DARRIN T.  MISH: And how they can come against you individually even if you own the business, they can come against the person who owns the business.

KATRINA MADEWELL: We’ll be back after a commercial break. Stick around.

(commercial break)

DARRIN T.  MISH: Welcome back to the IRS Solution Attorney Show. I am your host, the one, and only IRS Solution Attorney, Darrin T. Mish.

KATRINA MADEWELL: I’m your co-host, messing around in the studio with the phone.

DARRIN T.  MISH: Katrina is doing a little audiovisual work for us today in the studio. Today we’re talking about payroll taxes and I’d like to explain what happens because if you’re a W-2  wage earner, you’re probably wondering what we’re talking about. Let me set the stage a little bit. I can tell you from personal experience because this has happened to me in the past.

KATRINA MADEWELL: Wait, you’ve owed payroll taxes? And you’re admitting that?

DARRIN T.  MISH:  Yes, it’s been quite some time. I did generate a payroll tax problem for myself, and then went to look for help, couldn’t find any and had to figure it out myself. Which is kind of neat.neat.

KATRINA MADEWELL: I figured it out myself too, I don’t know if I did the right thing.

DARRIN T.  MISH: At least I know how it feels, right?

Here’s what happens. You’re an entrepreneur, you’re running a small business and you have employees that are generating much, if not all of the work that’s being done, that’s profitable.

KATRINA MADEWELL: It doesn’t always happen like that.

DARRIN T.  MISH: That’s the ideal solution. And something happens. There’s a bad month. Cash flow gets a little short. Let’s say your payroll…

KATRINA MADEWELL: A lot of fixed expenses in a business that doesn’t change whether you have income or not.

DARRIN T.  MISH: Let’s say your gross payroll is $10,000 a month and your net payroll is $8,000 a month. Here’s what I mean. Gross payroll is the employee’s wages, plus all the taxes, and the net payroll is like let’s skip all the taxes and stuff, let’s just make sure our people get paid so they don’t quit. What happens is the business owner starts making net payroll because there’s been a down turn in business, or whatever, and then nothing happens. The IRS doesn’t notice and nobody says a word. This down trend continues and the business owner is trying to turn it around, it doesn’t get better.

So, he’s like, hmmm, I’m going to do this net payroll thing until the business gets better. And it doesn’t change and the IRS doesn’t come after him and before you know it, it’s been a year or two, or three. And the bill is racking up. Eventually, that revenue officer comes out and knocks on the door and says one of two things. Hey, we’ve noticed you owe us a lot of money, or we noticed you just stopped filing your quarterly 941’s in 2015.

KATRINA MADEWELL: Isn’t that usually what they might say? What’s a typical answer for that?

DARRIN T.  MISH: From the business owner?

KATRINA MADEWELL: Yeah, what do most people say to that?

DARRIN T.  MISH: About what I just said, Oh, yeah, yeah, yeah…I’ve been meaning to deal with this. I’m glad you’re here.

KATRINA MADEWELL: In my case, I’m like, what? You’re who? Are you sure?

DARRIN T.  MISH: My case was a little different, I was filing the 941’s and I knew I owed them the money.

KATRINA MADEWELL: You’re definitely on the radar.

DARRIN T.  MISH: I just didn’t know how I was going to go about it. Mine wasn’t very big. I think my total problem was $5,000 or $10,000. At the time, 20 years ago, might as well have been a million dollars to me because I didn’t have $5,000 or $10,000.

KATRINA MADEWELL: For me, when the rates were 7 or 8% back then.

DARRIN T.  MISH: Remember, the penalties for payroll tax filings late or unpaid, the word is draconian, they’re terrible.

KATRINA MADEWELL: What is terrible? Is it better to file it, even if you don’t have the money to pay it?

DARRIN T.  MISH: I would suggest it is. The late filing penalty for one minute late is 10% of gross payroll. Let’s do an example.

KATRINA MADEWELL: You said $10,000 a minute ago.

DARRIN T.  MISH: Say it’s $25,000, 10%, $2500. Boom. One minute late. That’s draconian if you ask me. If you owe $1,000, the penalty is $100. Maybe not draconian because $100 isn’t much money, but if your payroll is $1,000, $100 might be a lot of money to you.

KATRINA MADEWELL: Yeah.

DARRIN T.  MISH: That’s how these problems happen.

KATRINA MADEWELL: Any extra money you have to pay the IRS is a lot of money if you ask me.

DARRIN T.  MISH: That’s how these problems occur. It’s not really bad people saying I’m going to do this bad thing. I’m not saying it’s even a bad thing, I’m saying they don’t intend to generate a large tax liability. It’s just one of those things that get out of hand.

KATRINA MADEWELL: they’re busy trying to run a business. It’s not on the top of the priority list.

DARRIN T.  MISH: Right. A lot of times, as business owners’, we’re slow to lay people off. There’s a down turn and we have five people and maybe we only have enough work for three people. Then we think about their families, their kids.

KATRINA MADEWELL: You add the human aspect to it.

DARRIN T.  MISH: So you’re like, wow, I can’t lay these people off. I can turn it around, I’m the business owner, I can make this happen. I’ve seen time and time again it just doesn’t get turned around. There’s either a market change like when the real estate crash happened. There are all kinds of things that can happen where your business model changes.

My business model radically changed between 2013 and 2014 for reasons we don’t need to discuss right now, but it did. It radically changed and I had to lay a bunch of people off and reorganize what I was doing because there was changing market conditions.

KATRINA MADEWELL: It can be any little thing. it can be a tax change, it can be a market change. It could be a competitor, it could be where you rank on Google, it could be lots of things. My advice to business owners who are in this trap I’m discussing where they’re falling behind on their payroll and their payroll, in general, is higher than what business is able to support, you need to think about laying people off.

KATRINA MADEWELL: What if someone is at this place now where they owe, maybe in your scenario, it’s a year, and they got say four quarters they haven’t paid, they’ve finally come to the realization they have to lay some people off and do it, but they missed filing the 941’s. Is it good in that particular case? Would you suggest they go ahead and start paying this quarter and filing and wait and see what happens with the other ones? or catch up as soon as they can?

DARRIN T.  MISH: We’ve been doing the show now for a couple of years together and you’ve really learned a lot. What you just described was, should the taxpayer get current or worry about the back taxes? Let’s define what current means. Should you start paying your ongoing payroll obligations or should you worry about paying old stuff? The answer is a little counterintuitive. You should start paying the current ongoing payroll obligations. Because if you don’t do that, I can’t solve anything. it’s unsolvable. It will go on as long as you’re in business or until the IRS puts you out of business because that’s the key. The IRS will try to explain this to you but there are varying levels of ability to explain that to taxpayers and taxpayers don’t necessarily listen.

KATRINA MADEWELL: What do you mean by that?

DARRIN T.  MISH: What I mean is the revenue officers don’t explain it that well.

KATRINA MADEWELL: Ok.

DARRIN T.  MISH: Some do, some don’t. If the taxpayer is already suspicious of the revenue officer, they’re not going to listen as well as they should and they’re not going to take advice. Maybe they shouldn’t. I don’t know.

KATRINA MADEWELL: It depends on what they say.

DARRIN T.  MISH: Right, it depends on what they say. Remember, the revenue officer works for the government, I work for you. That’s the difference. So, you want to get current and then you want to address the back problem, in that order. And that goes for personal income taxes as well. If you’re behind or you can pay your estimated tax payments, you should pay your estimated tax payments.

KATRINA MADEWELL: So, how does it work in that scenario? Someone is a year behind, they didn’t file for four quarters, they’ve laid some people off, now they started paying. Maybe they haven’t hired you yet. How does it work as far as the penalties? Does it change with time? Is there interest also tacked on? Where should they start?

DARRIN T.  MISH: The penalties and interest are crazy. In order to answer your question, I have to explain one of the most complex things that I ever have to explain in my practice. Here goes. Over the years, I think I’ve devised a relatively simple way to explain this. I want you to imagine a pie or a pizza. The pie represents all of the payroll taxes that the business owns. The total amount. Then what we’re going to do is cut this thing in half, but it’s going to be one of those deals where the kids would fight because there’s a small half and a big half. The big half is about 65% and the small half is about 35%, so it’s close. There’s going to be an argument at the dinner table. The big half represents the employees share of the payroll taxes. So we kind of know, as employees, we pay half of the FICA, half of the Medicare and all of the income tax.

KATRINA MADEWELL: Mmm Hmmm.

DARRIN T.  MISH: But the employer withholds that for the benefit of the employee and the benefit of the government. That’s called the trust fund portion of the tax. It’s called that because of the employer, theoretically, holds it in trust for the employee and the government. That word “trust fund” really is important because the government gets kind of wound up about this. You were supposed to be holding that in trust. So, in theory, it’s like you stole it. If you were the employer and you didn’t pay it to the government. So, that small half is called the non-trust fund portion and that’s 35%, give or take, and that represents the employer’s matching so it’s half of FICA, half of Medicare, and all of the federal unemployment tax. So, you have this big half and this small half.

What will happen…Oh, well.

KATRINA MADEWELL: We might have to wait until after the break to see what happens.

DARRIN T.  MISH: In the next segment, we’ll talk about what happens. But I can tell you, I’ll give you a hint, what will eventually happen is there will be some people, in addition to the corporation, that will end up being held responsible by the government to pay one of those halves of the tax.

KATRINA MADEWELL: That makes sense. I like your analogy about the big half and the small half.

DARRIN T.  MISH: It’s something I’ve developed over the years because it’s a complicated concept that I have to explain to people and I have to get them up to speed fast.

KATRINA MADEWELL: Most people are visual. If you can explain it auditorily then it makes sense.

DARRIN T.  MISH: When people come to my office, I have a white board in the conference room and I draw it and that’s even better.

KATRINA MADEWELL: We’re going to draw it for you with our words. This is the IRS Solution Attorney Show. If you want to get Darrin, you can get him at 888-GET-MISH.

DARRIN T.  MISH: That’s 888-438-6464.

KATRINA MADEWELL: We’re here in the studio, we’ll give you the call in lines when we come back.

(commercial break)

DARRIN T.  MISH: Welcome back to the IRS Solution Attorney Show. I am your host, the one and only IRS Solution Attorney, Darrin T. Mish.

KATRINA MADEWELL: I’m your co-host, Katrina Madewell.  Not an IRS attorney. Thank goodness.

DARRIN T.  MISH: I have to say something about the bumper music. God bless Texas. I posted on Facebook just yesterday, those Texas are making me even more proud to be American. I love the can-do spirit. Those guys are going I posted on Facebook just yesterday, those Texas are making me even more proud to be American. I love the can-do spirit. Those guys are going through just hell. Watery hell. It’s inspiring.

KATRINA MADEWELL: Did you hear about the lady, the one that was pregnant, and they formed a human chain to get her where she had to go?

DARRIN T.  MISH: Unbelievable. I think I saw a photo of that.

KATRINA MADEWELL: Isn’t that awesome?

DARRIN T.  MISH: It’s awe inspiring. We need to focus more in this country on what brings us together and not the slight, minor differences. We’re having riots over minor stuff.

KATRINA MADEWELL: over political differences.

DARRIN T.  MISH: Over ideas, primarily.

PAT GEORGE: What about the storm you said might be headed that way? Another one?

DARRIN T.  MISH: I think I heard today on the news coming into the studio that there’s some kind of disturbance depression thing in the gulf and it may hit somewhere again in the gulf. It’s too early to tell. It probably won’t be a major hurricane, but it could be a tropical storm.

PAT GEORGE: I’m looking forward to taking Hurricane Irma to Cuba with me.

KATRINA MADEWELL: No.

DARRIN T.  MISH: If you haven’t heard, there’s a hurricane way out in the Atlantic. Closer to Africa I think.

PAT GEORGE: Another gift from Africa.

DARRIN T.  MISH: You guys might be riding that…You guys might be surfing Irma.

KATRINA MADEWELL: I saw it pop up but I didn’t read it, Pat, I didn’t have time I think the phone rang or something. But those passengers that were supposed to go in Galveston ended up being stranded on the ship. I forget where they went, but they got off significantly later.

PAT GEORGE: This was a couple of days ago. They went to Miami and they parked in Miami and they had the opportunity to stay on the boat or get off in Miami and fly home.

KATRINA MADEWELL: I would stay on the boat.

PAT GEORGE: I would stay on the boat too.

KATRINA MADEWELL: They have to have a passport to get off, don’t they? I think they do because they went over international waters and changing the port of call.

DARRIN T.  MISH: Every cruise you have to have a passport anymore.

KATRINA MADEWELL: Nope.

DARRIN T.  MISH: Every cruise has to visit a foreign port unless it’s manned by an All American crew with an American flag.

KATRINA MADEWELL: There’s a lot of people that travel without passports and chips.

PAT GEORGE: I take my EBT card, that works.

DARRIN T.  MISH: Ok, so we’re talking about payroll taxes today. Moving along.

KATRINA MADEWELL: I got nothing.

DARRIN T.  MISH: We’re talking about payroll taxes. In the earlier segments, I described how business owners get into payroll tax problems. They have cash flow problems, they can’t pay the gross payroll with the taxes so they start paying the net payroll. That means they’re just cutting checks straight to employees without the taxes going to the government. That spirals out of control because they typically wait too long before they make the changes in staffing or whatever that they need to make.

KATRINA MADEWELL: Then you explained the pie.

DARRIN T.  MISH: I call it the payroll tax pie. which is basically a pie cut down the middle, but there’s a big half and a small half. The big half is about 65%. it represents the employees’ withholding, which you remember is half of Fica, half of Medicare, and all of the federal income tax. That’s called the trust fund portion of the tax. it’s called the trust fund portion because the employer is supposedly holding this money in trust for the benefit of the employee and the benefit of the government.

Here’s what happens. If you have a trust fund portion over about nine grand, the IRS is going to send you a love letter, personally, and ask that you come down for an appointment for an interview.

KATRINA MADEWELL: An interview? it’s not a job interview.

DARRIN T.  MISH: We call it a 4180 interview because they’re going to fill out form 4180. Or they’re going to talk to you about what was going on in the business. So, who was hiring and firing, who was signing checks, who was signing the 941’s, who was making hiring decisions, who made the decision to pay other bills instead of the taxes.

KATRINA MADEWELL: And why do they want to know that?

DARRIN T.  MISH: They’re trying to determine what is known as the responsible parties.

KATRINA MADEWELL: Isn’t everybody responsible if you’re a business owner?

DARRIN T.  MISH: No, the guy that sweeps the floors is probably not responsible. Here’s your question, aren’t all owners responsible?

KATRINA MADEWELL: That’s what I said.

DARRIN T.  MISH: It was vague.

KATRINA MADEWELL: if I didn’t, fix me. That’s what I meant to say.

DARRIN T.  MISH: Most business owners are going to be responsible.

KATRINA MADEWELL: Yeah, so if you have two.

DARRIN T.  MISH: I can tell you if you have two owners, two shareholders, partners, then there’s a pretty good chance that they’re both going to be held responsible.

KATRINA MADEWELL: Yeah. We can hear you. Something’s a little messed up with the headphones.

DARRIN T.  MISH: If you have two partners, they’re very likely to both be held responsible for the trust fund portion. Does that mean they both have to pay the trust fund portion? Let’s say the trust fund portion is $50,000. Partner A is assessed the $50,000 and Partner B is assessed the $50,000. What happens if Partner A pays and Partner B doesn’t?

KATRINA MADEWELL: I know the answer to this one.

DARRIN T.  MISH: It’s a joint and several liability. Which means if one guy pays, the other guy gets the benefit. Not only that but if partner A pays $50,000, then that $50,000 comes off the business’ total bill. Did I explain that well enough?

KATRINA MADEWELL: Yeah. I can tell you how the IRS explained it.

DARRIN T.  MISH: Also, this is kind of tricky. If you have Partner A and Partner B that are both personally responsible and this takes seven years to pay off, well there’s interest running on that trust fund penalty during the seven years. What happens to the interest? They both get to pay interest. Separate interest, which is totally unfair. It’s crazy. It’s so unfair. Congress needs to fix that. Why would the IRS get to collect interest from the company and interest from Partner A and Partner B. I’ve seen as many as four people held responsible simultaneously. and they all have to pay interest. It’s crazy, it’s insanity. But that’s our government for you.

I think that’s just like a flaw in the law that hasn’t ever been fixed. This is all to answer your question, so what do you do? You said, you get current and then what do you do? You’re going to want to try and pay off the trust fund portion first.

KATRINA MADEWELL: How do you do that? Are you filing and just send part of the money?

DARRIN T.  MISH: You’re allowed to make what is known as voluntary payments. This is a principle that’s common throughout the IRS resolution world and that is a taxpayer can always make a voluntary payment. This makes sense. If you want to pay, you have the right to pay.

KATRINA MADEWELL: Yeah.

DARRIN T.  MISH: A voluntary payment…

KATRINA MADEWELL: Is that the same thing as far as paying weekly, monthly, quarterly?

DARRIN T.  MISH: A voluntary payment is a purely uncoerced payment. You have decided that on this occasion, you are going to pay. Not an installment agreement payment, just a purely voluntary payment. You have the right to designate where you want that money to go in every instance. So you get to decide. If the IRS levies your account or if you’re in an installment agreement, the IRS gets to decide where they’re going to apply it. This is why the principle is important. If you’re in an installment agreement with your business, the IRS is going to pay off the non-trust fund portion first. Why? Well, because they have these people on the hook also.

KATRINA MADEWELL: Yeppers.

DARRIN T.  MISH: That’s how the IRS is going to want to apply it. They’re going to want to pay off the non-trust fund and then the trust fund, then the penalties and interest later. What we’re going to do, if we can, if we can afford it, is we’re going to pay the trust fund portion off first. Why does that matter? Don’t we want to try and get the humans off the hook first? It’s the same money. The interest will be the same regardless but we want to pay off the trust fund first so we can keep the partners, the business owners out of the mix if we can.

To be frank, most of these cases are handled in installment agreement on the back end. The first thing we have to do is get the taxpayer current, start paying your current payroll taxes. If you have to lay people off, lay them off. If you have to go out of business, that stinks, but you have to go out of business. It’s either you or them in that case. it’s either you as the business owner is going down because you’re sinking yourself under the debt of this unpaid tax, or you have to lay some people off. The greater good, typically, is to lay people off because then you’ll live to fight another day.

Then, we get the client current, get the company current, then we’ll go the IRS and ask for an installment agreement. Then we’ll try and make some monthly payments. They typically want it done in two or three years. It can go as long as ten years. We might be able to get some penalties abated based on what’s called reasonable cause, which is a darn good reason you fell behind on your payroll. I can tell you what’s not a darn good reason.

KATRINA MADEWELL: What?

DARRIN T.  MISH: I didn’t have the money. Not a darn good reason.

KATRINA MADEWELL: If you don’t have the money, express it in a different way.

DARRIN T.  MISH: I’ll give you an example. There are probably hundreds of businesses in Houston that are flooded right now. I know for a fact that a lot of those businesses are still paying their people because they feel like it’s the right thing to do, and it probably is. There’s going to be a bunch of businesses that fall behind on their payroll. Is the worst flooding in the history of the United States a good enough reason to not pay your payroll taxes?

KATRINA MADEWELL: Probably.

DARRIN T.  MISH: I’m going to go, yeah. That’s a reasonable cause. One reason could be a significant downturn in a business like the real estate crash. Can you string together 18 quarters in a row and blame it on the real estate crisis? I’m going to submit to you, no, that’s not going to work.

KATRINA MADEWELL: Maybe back in the day it probably was. Thank goodness that wasn’t the case.

DARRIN T.  MISH: A real question would be how many quarters can I string together for a reasonable cause and still have a chance. I don’t know probably four. Maybe eight. A year or two. Maybe. At some point the government is going to look at you and say, after 18 months you probably should have figured out you have too many people and you can’t pay your payroll taxes and you need to move along.

These are some of the tough lessons we learn when we’re in business for ourselves. I don’t think employees get it. In fact, I know employees don’t.

KATRINA MADEWELL: No, they don’t.

DARRIN T.  MISH: They don’t get the stress. I can speak for myself. It is more stressful to lay somebody off than it is to not take a paycheck.

KATRINA MADEWELL: Absolutely agree.

DARRIN T.  MISH: People work with you, you get to know their families, you get to know about their kids you get to know about the things they do for fun. It hurts to lay people off. it’s not a good thing.

KATRINA MADEWELL: For sure.

DARRIN T.  MISH: I’m getting a little teary. it’s kind of corny.

KATRINA MADEWELL: I’ve been there, I’ve done that and it sucks every single time. There’s never been a time when I was like woo hoo.

DARRIN T.  MISH: It even stinks to fire bad employees.

KATRINA MADEWELL:  Yes.

DARRIN T.  MISH: It’s not my favorite thing to do. But you have to learn to get good at it as years go by or you’re going to go out of business. You can’t keep bad people on and you can’t keep too many people on.

KATRINA MADEWELL: The only way you can do that is if you want to hire an HR person and let them do it.

DARRIN T.  MISH: Then you bring them into the office and tell them to go fire that person. The point is, these are hard decisions that business owners have to make. Lots of business owners keep people on for too long and then they end up going down with the ship.

KATRINA MADEWELL: I remember when I worked for a place w hen I was young and I supervised four departments. During my course of working there, they hired an HR person. So this HR person, their primary job was to hire and fire, make sure there are regulations. They came in one day and they were like, oh, we’re going to let so and so go, we want you to do this. I’m not doing it. You can call so and so, they’re the HR person, they can do it.

DARRIN T.  MISH: So you were passing the buck, even all those years ago.

KATRINA MADEWELL: Somebody was getting paid to do that job.

DARRIN T.  MISH: They were probably better at it than you were.

KATRINA MADEWELL: I didn’t want to do it.

DARRIN T.  MISH: You had no experience in doing that. It’s just one of those things that are really hard. No one likes to fire anyone or lay them off. It’s just not a lot of fun.

KATRINA MADEWELL: This is the IRS Solution Attorney Show we’ll be back in a few minutes. when we come back, I’ll tell you the answer I got to the question where they said you have two partners, what happens when you owe the tax? I’ll tell you the answer they gave me when we come back, right after the break.

(commercial break)

DARRIN T.  MISH: Welcome back to the IRS Solution Attorney Show. I am the one and only person that calls themselves the IRS Solution Attorney, Darrin T. Mish.

KATRINA MADEWELL: And I’m your co-host, Katrina Madewell. I fixed the stream, the buffer. It was my phone. The Wi-Fi, I have to give Beasley credit, it’s back on track.

DARRIN T.  MISH: A media company should have good Wi-Fi.

KATRINA MADEWELL: Let’s go back to the answer. We were talking about what happens if you have two partners in a business, you haven’t paid it and now the revenue officer shows up at your door. And you’re wondering, don’t I only owe half?

DARRIN T.  MISH: That’s a common misconception. People think if Partner A is assessed $50,000 and Partner B is assessed $50,000 and if it’s the same $50,000 and there are two partners, that means it’s $25,000 each.

KATRINA MADEWELL: Even if it’s a 90/10 split, right?

DARRIN T.  MISH: In a perfect world, it would be a $25,000 split.

KATRINA MADEWELL: I’m saying one business owner can own 10% and one can own 90%, but they’re both equally liable for the $50,000.

DARRIN T.  MISH: Absolutely. That’s the real deal. Each person that’s assessed for the same money is responsible, jointly and severally for all of it. What does that mean? It means whoever pays first pays it. You all can sue each other afterward if that’s what needs to happen. That’s not typically what happens. The IRS doesn’t care where they get the money. They’re going to get it from one of the two of the owners. They’re going to get it from whoever they can.

KATRINA MADEWELL: That’s what she told me. She was nice, but she said the IRS doesn’t care how or where they get the money, you’re both liable, they’re just going to get it. She probably didn’t say freeze, I know in hindsight now with doing the show with you. But if we have to freeze both of your bank accounts or swipe the money or whatever…

DARRIN T.  MISH: She probably said freeze.

KATRINA MADEWELL: Then that’s what we’ll do. She might have said freeze.

DARRIN T.  MISH: She probably did. It’s not literally a freeze.

KATRINA MADEWELL: She said if we have to freeze both of your bank accounts, that’s what we will do. My partner at the time said, well, I’ll just live off of cash. I couldn’t live like that. We ended up repaying all of the debt.

DARRIN T.  MISH: I have a story that’s like that. I have a client who sold the business but he was peripheral consultant partner involved in the business. That’s common.

KATRINA MADEWELL: When you sell it you remain for an “x” number of time.

DARRIN T.  MISH: You remain involved in the business. The business owed about a half million dollars. There were four partners. He came to me and said you have to help me with this. I said I think we can do an offer in compromise. You can’t do an offer in compromise generally speaking on the payroll tax problem as a company. The government is not going to give your company a deal to the detriment of all your competitors who are actually paying their payroll taxes. Does that make sense?

KATRINA MADEWELL: That’s the bigger chunk, isn’t it?

DARRIN T.  MISH: If you’re a roofing company and you owe the IRS a half a million dollars in payroll taxes, they’re not going to cut that and let you have that advantage over all the roofing companies that pay their payroll taxes. You’re not getting an offer as a company. But can you do an offer in compromise, make a deal, on the trust fund portion as we’ve described? The answer equals yes.

He came to me, there were four partners in total, the other three partners were flat broke. Or at least living cash lifestyles, we don’t really know, but they’re broke.

KATRINA MADEWELL: In that line of work, it would make sense.

DARRIN T.  MISH: He wasn’t a roofer. I think they were in home health care or something like that. We did a deal with the IRS and I think we settled that $500,000 debt for somewhere around $43,000. I think. It was well below $100,000. What happened to that money? My guy was completely absolved of the obligation to pay back any more of the half million and that $43,000 came off everybody else’s half a million dollars too. I don’t know what happened to those other three people. I’ve never spoken to them. As far as I know, they still owe it.

KATRINA MADEWELL: Probably not a dang thing.

DARRIN T.  MISH: As far as I know the IRS is still chasing them around and trying to collect the money. That’s a good example there of the joint and several liability nature of this problem. My guy made a deal, he paid some money and it came off their balance too.

KATRINA MADEWELL: You have to be careful who you go into business with. I started my business at 23 and I learned that the hard way.

DARRIN T.  MISH: A business partner in many ways is like a spouse. Or maybe in some ways…

KATRINA MADEWELL: Til death to us part.

DARRIN T.  MISH: Financially more intimate than a spouse. You also have to make sure that if you’re an employee of a company that you’re not signing stuff. You really don’t want signature authority on the checking account. You really don’t want to be signing 941’s.

KATRINA MADEWELL: Because that can make you liable?

DARRIN T.  MISH: It can make you liable. You can be an employee of a business and the IRS can determine that you were a responsible party because you were making some of these decisions. Even if you’re making these decisions at the behest of the boss. If you’re the manager of the business and you’re the one that does the hiring and firing, you’re the one that decides which bills get paid so you don’t go out of business. You hire and fire, signs checks, signs 941, you’re going to be held responsible along with the guy….

KATRINA MADEWELL: Like personally?

DARRIN T.  MISH: Personally. Along with the guy who owns the business. You have to be careful. You do not want that authority.

KATRINA MADEWELL: Would that apply for a bookkeeper too that made the payments?

DARRIN T.  MISH: There has been some cases over the years where the court has held that the bookkeeper was responsible as well.

KATRINA MADEWELL: The bookkeeper, if they’re smart and see the business owes money, they’ll be like, see you later.

DARRIN T.  MISH: One of the things I tell people is you really want to get a payroll company. You should just stop doing payroll in-house because that’s where the mistakes happen. Employees hide things from you. Sometimes employees are trying to prevent the stress of the owner. I’ve had this happen to me. So, they hide things that are negative that you as the owner may not want to deal with but you have to deal with. if you don’t know about it, you can’t deal with it. So, they’ll hide it from you and then that allows the problem to get worse and worse because it snowballs.

The gentleman I spoke with yesterday said this employee that was supposed to be handling it was hidden from him for a year. That’s how we’re in the situation where we owe $200,000 – $300,000.

KATRINA MADEWELL: Let’s go back to our example. We talked about if you didn’t make your payroll taxes for a year. Then you said, ok, I’m going to get current. Pay for now and figure out how I’m going to do this mess later. how would someone start voluntarily paying this? I know I just go online and pick the quarter and then I pay it. What should that look like specifically?

DARRIN T.  MISH: If you’re going to make a trust fund designated voluntary payment, then you’re going to want to write on the check in the memo line the EIN, to be applied to trust fund portion of such and such court. What we do is we send a cover letter as well so we can prove two ways that we applied this to the trust fund.

KATRINA MADEWELL: Do not do it online? Send a check?

DARRIN T.  MISH: For trust fund designated payment, I don’t think you can do it online. Use a check.

KATRINA MADEWELL: I don’t think I remember seeing anything like that.

DARRIN T.  MISH: I don’t think you can do it using IRS Direct Pay yet where you can designate to the trust fund. They really don’t want you to even know that.

KATRINA MADEWELL: They’re not going to put it on there as a line item.

DARRIN T.  MISH: They don’t want you to know, as taxpayers that you have that opportunity. It’s kind of a secret they’re withholding from you. You have to follow that advice. You have to designate it in writing, you have to mail it in.

DARRIN T.  MISH: If you have a payroll tax problem, we hope you enjoyed the show today. If you’d like to talk to me more about it, you can give me a call at 888-GET-MISH. 888-438-6474. Or visit the website at getirshelp.com.

KATRINA MADEWELL: Have a great weekend everybody.

DARRIN T.  MISH: For today, we’re out.

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