I am sure you know that part of our services is to prepare payroll and tax submissions on behalf of clients. (Our fees are better than ADP and Paychex- and we go beyond simply providing you paychecks.). But, we also refuse to pay the taxes on behalf of our clients. A few of them are pretty annoyed- at first.
Our services include advising them to use different banks for payroll than they employ for operations. And, we also inform them to make deposits long before the taxes may be due. That way- if they wait until the last moment to send in their forms and final quarterly/monthly payments (which happens way more than just one or two times a year, it seems), they incur no penalties. Because the amounts due are less than the “threshold” amounts that incur IRS penalties.
But, the real reason why we don’t make tax payments- even from our clients’ own accounts- is because of the issues that can arise should a check bounce, there are insufficient funds, or worse.
Consider this recent real-life example. (Please note that it is our supposition that there is way more to this issue than appears in the court transcripts. I’ll make such comments as appropriate in this discussion. )
Dr. Robert McClendon operated a family medical practice, aptly called Family Practice. He hired Richard Stephen, Jr., to serve as the CFO. (Most moderate-to-large sized medical practices employ CFO’s. After all, while lawyers and physicians generally understand their professions well- they prove to be confounded by business issues.)
The plot thickens. Mr. Stephen was “borrowing” corporate funds. (This is not a supposition; he has already plead guilty to three counts of felony theft.)
How much did he borrow? Perhaps as much as $ 10 million. Because that is how much Family Practice owed the IRS in unpaid withholding and payroll taxes by 2009. At that time, Dr. McClendon closed up shop and turned over the accounts receivable to the IRS, but he also loaned the firm $ 100,000 to cover its last payroll.
But, you see, not paying payroll taxes and withholding taxes is the absolute BEST way to piss the IRS off. (Yes, I chose that expression on purpose. It’s an understatement!) Because the failure of a business to pay these taxes means each and every one of their employees has been hurt. And, the Social Security Administration needs every penny it can get its hands on.
So, the IRS decided (via the Tax Court ruling, too) that Dr. McClendon was not only responsible (after all, it was his business), but he was willful in failing to pay the taxes.
“Wait a minute!!!!!”, you say. The good doctor was not preparing the payroll, he was letting Richard Stephen handle that part of the business. But, willful under the tax code doesn’t mean you are evil or had terrible motives. (That exactly was the doctor’s point- he knew he was a responsible party, but he claimed there was no “willfullness” on his part by not paying the taxes. )
The Court (including the US District Court in South Texas; note that the December 2016 decision is under appeal- again. The plaintiff is trying to limit his liability to that single $ 100,000 loan he made to his firm) held that the doctor knew he owed the taxes and he never stepped up to pay them. And, that loan that had “…the restricted purpose..” of only covering the 15 May 2009 payroll REALLY blew his case.
You see, the IRS holds that a taxpayer must use unencumbered funds to pay back taxes owed to the IRS- not other creditors. And, those (now-former) employees were simply other creditors. That payment led to the IRS sending the good doctor a small bill… one totaling some $ 4,323,343.70. Moreover, when we are dealing with unpaid payroll taxes (called trust fund moneys), the burden of proof is on the “responsible party”.
Who is a responsible party? Anyone who has ownership in the enterprise (this even includes the officers and directors of the business)- or even just someone who has signature authority over a bank account. The Trust Fund Recovery Assessment (aka a 100% penalty) can be legally assessed against EVERY responsible party under IRS Section 6672(a).
Not knowing the taxes are not being paid (sorry for the double negative) is simply no excuse, either. The IRS goes after each and every responsible party for the full amount- until the full amount due is collected.
Moreover, the IRS can shut the company down to ensure the situation doesn’t get worse. (If small payments are being made, the IRS, via the Justice Department, can seek- and obtain- an injunction that demands timely deposits of current taxes and forms- as well as the pay-down.)
By the way, using a payroll service is no guarantee against this problem. I won’t even bother to mention how often these folks make mistakes- for which the business owner gets stuck with the penalties and interest. But, there have been more than a few cases where the payroll firm neglected its obligations or just kept the money for itself.
So, when we say, “Please make a deposit of $ 2499.83 by next Friday”- it’s for your own good.
Getting ready to do your taxes yourself? This will inform you of what has changed for this year’s filing season. (Of course, you can contact us- we’ll ensure that you pay the lowest amount of taxes required by law. 🙂 )
