Payroll Tax Services – Who is Responsible to the IRS?
August 9, 2012
by Larry Goldsmith, C.P.A., J.D., C.F.F.A.
As a Forensic CPA, I often hear stories about clients or their partners, employees, or spouses who have stolen or have hidden assets. But there’s one scam which you don’t hear about very often and which should scare every business owner: what happens when your trusted payroll service fails to make your tax payments to the IRS?
Just today a small business owner confessed to me that his payroll service stole $7 million from him and other businesses. The payroll service collected tax monies from their clients, and instead of making the payments to the IRS, the owners of the service simply pocketed the money. The trusting small business owner was required to pay the IRS nearly $40,000; in effect paying the payroll tax obligation twice.
Who is responsible?
More and more we hear about trusted people and businesses stealing from their clients and associates. Violation of fiduciary responsibility inevitably escalates during periods of economic hardship, but the potential to be a victim of ‘white collar crime’ is always present. As a business owner, it is important to continually verify that employees and business partners are doing what is expected of them.
Who is responsible in the case of non-payment of payroll taxes when a payroll service has been engaged? The Internal Revenue Service regulations state quite clearly:
- The employer is ultimately responsible for the deposit of Federal tax liabilities.
- The employer is liable even if a third party payer fails to make the payroll tax deposits in a timely manner.
- It is the employer, not the payroll service, who is liable for unpaid taxes, penalties and interest.
- The employer has a duty to review their EFTPS account to verify that the third party payer actually paid the taxes.
An ounce of prevention is always worth the proverbial pound of cure. To avoid the headaches and financial distress of misplaced trust, CJBS recommends that business owners follow this Five Step Anti-Swindle procedure:
- Examine checks clearing the bank accounts monthly.
- Have someone verify payroll tax deposit credits on-line.
- Examine customer credit memos regularly.
- Examine delinquent accounts receivable.
- Spot check cash payments.
CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at larry@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.
Illinois Small Business Jobs Creation Tax Credit Program
July 18, 2012
by Michael W. Blitstein, CPA
To help move the Illinois economy to a sustainable recovery, the Small Business Jobs Creation Tax Credit has been extended by Governor Quinn and the General Assembly with some new components.
Effective July 1, 2012, new, full-time jobs created beginning July 1, 2012 to June 30, 2016 will be eligible for tax credits. The program will either run until June 30, 2016 or it will immediately come to a close if $50 million in tax credits are issued prior to that 2016 date.
Overall, not a lot has changed from the pilot program to this extended program. Eligible businesses (and not-for-profit businesses) are still those with 50 or fewer full-time employees. Eligible jobs are those that pay at least $10/hour or $18,200/annually and the position must be sustained for one full year from the hire date.
One important thing to note: You do not have to keep the same individual in the position the entire year, but you will need to make sure the position is filled with any number of employees for at least one year from the actual hire date.
A new piece to this program is that PEO’s (Professional Employer Organizations) would be able to receive a tax credit based on their working relationship with an eligible business. If a PEO has been contracted by an eligible business to issue W-2s and make payment of withholding taxes, then they could enter their information and be eligible to receive a tax credit.
After creating one (or more) new, full-time positions that meet the eligibility requirements, employers are eligible to receive a $2,500 per job tax credit. Theoretically, this will provide an extra boost for employers, enabling them to grow their businesses in Illinois.
To register a position or to learn more about the program please visit http://www.jobstaxcredit.illinois.gov.
CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.
A Look at Student Loans: Who Pays the Price of Higher Education?
November 1, 2011
by Larry Goldsmith, C.P.A., J.D., C.F.F.A.
Speaking at the University of Colorado in Denver recently, President Obama announced new executive actions to lower student loan payments. The initiative accelerates an income-based repayment plan that reduces the maximum required payment on student loans to 10% of annual income.
The measure was supposed to go into effect in 2014, but the president now wants it to start next year. The president says by lowering loan payments, people will feel more confident buying houses and making other purchases that will give the economy a much needed boost.
This sounds great, right? Student loans are the No. 2 source of household debt, and who can argue with lower loan payments? But I am concerned that many Americans fail to understand the whole picture.
Two years ago, the president took student loans out of the private sector and decreased bank profits. Banks are bad and they do not vote.
The net result was more Pell grants and more students going to college. As an economics major (or even an English major who understands the principle of supply and demand) you could have predicted this would lead to a substantial increase in tuition, making it harder for middle income families to send their kids to college.
People in my income bracket do not generally qualify for need-based grants and scholarships and we also generally do not have the income after taxes to pay for college without loans,
Nationally, student loan debt is greater than credit card debt because without the involvement of private companies, we now have higher school costs and increased debt defaults.
With Obama’s recent actions there will be greater loan forgiveness by the government which means that this entitlement program will be a casualty increasing the American debt. As I am part of the 50% of Americans who pay taxes, why should my burden be greater than others?
Now you may say that college education creates the future of our country, which is true. And there are students who will have their dreams of a better life realized in this way. But is the country to serve a few or are we the people to serve the country? Or is the middle class to serve the majority and suffer a greater share of the financial burden?
Our country’s challenges require complete and considered programs, not patchwork solutions. The current student loan programs are an example of policies that sound good to the masses, yet create a greater debt crisis and future problem. And you don’t even need a college degree to see that one, right?
It’s a Great Time to Make a Deal with the IRS
September 19, 2011
by Larry Goldsmith, C.P.A., J.D., C.F.F.A.
Just a brief note to let people know that this is an excellent time to work out unpaid tax obligations with the Internal Revenue Service. I recently negotiated what I think are excellent settlements for two clients:
1. A real estate developer and contractor with $1,000,000 of payroll tax trust fund tax obligations settled for $20,000.
2. A real estate owner of apartment buildings had $400,000 of unpaid income tax obligations settled for $100,000.
My experience with the IRS program and the willingness of the IRS to accept reasonable offers and compromises make this a great time to settle tax disputes and unpaid tax obligations. Obviously, this will not work for everyone, but as you can see, the strong possibility of an advantageous settlement offers hope to many.
Feel free to call (847-945-2888) or email me if you have questions regarding your tax situation, or are backed up with the IRS and are considering your alternatives.
Larry Goldsmith
Changes to Innocent Spouse Relief
August 16, 2011
by Larry Goldsmith, C.P.A., J.D., C.F.F.A.
The Internal Revenue Service recently announced that it will extend help to more innocent spouses by eliminating the two-year time limit that now applies to certain relief requests.
“In recent months, it became clear to me that we need to make significant changes involving innocent spouse relief,” said IRS Commissioner Doug Shulman. “This change is a dramatic step to improve our process to make it fairer for an important group of taxpayers. We know these are difficult situations for people to face, and today’s change will help innocent spouses victimized in the past, present and the future.”
The IRS launched a thorough review of the equitable relief provisions of the innocent spouse program earlier this year. Policy and program changes with respect to that review will become fully operational in the fall and additional guidance will be forthcoming. However, with respect to expanding the availability of equitable relief:
- The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.
- A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.
- The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.
The change to the two-year limit is effective immediately.
Existing regulations, adopted in 2002, require that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit, adopted after a public hearing and public comment, was designed to encourage prompt resolution while evidence remained available. The IRS plans to issue regulations formally removing this time limit.
By law, the two-year election period for seeking innocent spouse relief under the other provisions of section 6015 of the Internal Revenue Code, continues to apply. The normal refund statute of limitations also continues to apply to tax years covered by any innocent spouse request.
Available only to someone who files a joint return, innocent spouse relief is designed to help a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability.
IRS Increases Mileage Rate to 55.5 Cents per Mile
July 5, 2011
by Larry Goldsmith, C.P.A., J.D., C.F.F.A.
The Internal Revenue Service recently announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through December 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51. In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
by Larry Goldsmith, C.P.A., J.D., C.F.F.A.
The income tax system that we grew up with is suffering from dementia; it forgot that the purpose of taxation is to fairly tax individuals and businesses to support the funding of government services.
Today, highly paid tax attorneys are retained to influence Congress to provide loop holes in the Internal Revenue Code designed to benefit large corporations and only the wealthiest members of society. Typically, these changes shift the burden to small and mid-size business and middle-class wage earners, already straining to cover the costs of a ever growing governmental budget.
I have ideas that I wish to share with you that can have a profound positive effect for our economy and our standard of living. I propose a change that will provide hope for our children to live in a country that is not in peril of financial collapse. Let me start by saying I have no political agenda and no specific axe to grind; I address these issues from a purely economic footing, ignoring all political issues.
The current system…
Under the current system, the top corporate income tax rate for “C” corporations for the tax year 2011 is set at 39% for companies earning more than $100,000. State tax corporate rates vary, but can be as high as 10%. “S” corporations are taxed at the federal level on the individual’s income tax return rather than the paying of a separate corporate income tax. Most states do have a corporate “S” corporate tax rates from 2-5%.
The federal tax rate for highly compensated individuals has been increased from 35% to 39.6%, and state individual income tax rates vary from 0-10%. In Illinois the state tax just jumped from 3% to 5%.
The US has the second highest corporate income tax rate of the 34 countries in the Organization for Economic Cooperation and Development (OECD). So the big US corporations are extremely motivated to buy legislation to limit their taxation, or create solely owned foreign corporations that earn substantial profits without having to pay the their share of corporate income taxes back home. Recently General Electric earned a 2010 profit of $14.2 billion dollars and paid no corporate income taxes to the United States because the bulk of those profits, some $9 billion, were offshore. This was the second year in a row that GE reported billions in profits yet paid no income tax. This was accomplished by getting Congress to grant GE tax credits for the products it produces while still allowing GE to leave its profits off shore. The United States lost five billion dollars of tax revenue, just from this one company this year.
If this seems unfair to you – and it should – don’t blame the corporations who are simply working the system to maximize their earnings within the law. Blame the high corporate tax rates which force big business to go offshore and shift the burden of the tax base to the small and mid-size business owner. Though these small businesses employ the majority of the nation’s work force, they have the most difficulty obtaining bank lines of credit in tough economic markets, putting their owners at greater risk of personal bankruptcy. In fact, small business bankruptcies increased 10.4% last year. The number of businesses just closing their doors cannot even be accurately determined.
The average small business owner last year earned $100,000. They were taxed 7.65% for Medicare and social security taxes on their earnings, paid federal income taxes of 35%, plus state taxes. Let’s say total taxes of somewhere around 46.15% on their earnings. No offshore hiding place, no huge tax relief package from the Fed. Where’s the incentive to keep going? Many small business owners could simply close the doors, fire their employees and go to work for a corporation, with no personal risk, and keep more of their earnings – plus perhaps gain a pension and health care, something that fewer and fewer small business owners provide themselves because of liquidity and profitability issues.
The effect of our tax system…
Corporations who do pay taxes have to include a premium of approximately 35% of the cost to produce goods to cover the cost of corporate income taxes. For example; a hammer is manufactured here in the US at a cost of $10 for labor and materials. The hammer can be sold at wholesale for $30, yielding a profit of $20 to the manufacturer. But the company needs to include $7 to pay taxes in their cost structure so that the real cost is $17. Goods produced in China by a company that pays no US taxes can save that $7 of taxes and have a competitive advantage selling goods in the US over a US manufacturer. In other words, our taxing system is hurting US competition, keeping unemployment high, and is creating an environment where the US is dependent on foreign countries.
The system is such that neither foreign companies nor U.S. companies want to follow the rules. Everyone wants to cheat. With an elevated risk of investment in the US and the tax rate so high, it is difficult to get manufacturers to build plants here. If goods in the US were manufactured with our higher labor costs but the company was not taxed, the cost of goods would be much more competitive with a country like China that has lower labor costs but higher costs to bring the goods to market in the US (primarily shipping). Assuming that the US has better quality which goods would be purchased?
Individual entrepreneurs are faced with the same dilemma:
- Do they start businesses and employ workers or do they get a good paying job?
- Do they risk bankruptcy in a down economy or get a safe job where they can shut off the office phone at 5 P.M?
- Do they cheat on their income taxes or pay every last dime knowing that the fat cats do not pay taxes?
- Do they leave the country and create wealth in a tax friendly environment?
What is the answer…?
Like Dorothy, I wish there was an all knowing being who could solve these problems. Looking to Washington for acceptable solutions is, unfortunately, a vain hope. Most politicians have never owned a successful business or worked in a business to earn a living, and have little practical insight into the ramifications of the legislation they propose. Now, I may not be a wizard, but as an accountant and a lawyer with many years experience helping companies survive I have some idea of what can work and what can’t. Here are my ideas. They are rough, they require financial verifications, and one must consider the cost of implementation. But I believe that, properly executed, these steps would dramatically improve the current situation.
The answer, in a nutshell, is to adopt a consumer-based tax system with some modifications. Here’s the Larry Goldsmith Six Step Plan:
- A Flat Tax On Income for 5 Years — There would be a flat 10% individual income tax and no corporate income taxes. The hope is that with increased consumption taxes being produced, the flat individual income taxes can be abated in time. There is an argument that consumption taxes hurt the poor. My belief is that this type of tax will increase blue collar labor, improving the job prospects for the poor and allow for increased income. Secondly, the goods purchased will cost less, therefore benefiting the poor’s purchasing power.
My personal fear is that elected officials believe that they can’t get reelected if they cannot point to spending that they influenced. If there are too many tax dollars collected then there may be a temptation to spend it. So with that said, I believe the personal tax rate should be for no more than five years and renewable only if there is a legitimate need.
- All business “S” corporation profits will be subject to an 8% combined social security and Medicare tax that will be matched by the employer. This tax will be unlimited, meaning that if a corporation earns $1 million, the 8% tax will apply to the entire $1 million.Increasing the taxing basis will solve some of the ongoing Medicare and social security financial problems. As a note, Congress has borrowed $2.5 trillion from the social security system. In fact, last year Congress borrowed $103 billion from the social security system for their spending projects. There must be hand cuffs on these monies to prevent Congress from exercising their spending ways.
- There would be a 30% Federal sales tax on the end user on all goods, regardless of country of manufacture. A shirt made in South Carolina, costing $50 today, exclusive of state taxes, would now cost $38 due to the elimination of corporate income tax. Adding the new Federal Sales tax of $12 would bring the retail price of the shirt back to $50. But it would now be competitively priced, because the new tax would apply to all goods, regardless of where they were manufactured.
- Goods manufactured for foreign consumption would be less expensive because there will be no taxes placed on these goods. However, U.S. workers and companies will have manufactured these goods, and they will now have disposable income to spend as they wish on goods and equipment that will create tax revenue for the government. US companies will no longer have a need to keep money offshore along with their financial resources.
- There will be a lower tax rate – say 5% – for food and a 10% tax on rentals units. This is so that lower income workers will not be without food and a place to live for their families. However, while my plan calls for a lower tax on food, I would tax liquor, high calorie snack food, and high calorie drinks at the higher rate because of proven health concerns. This will also impact the overall cost of healthcare, further reducing national expenditure.
- Optional considerations are; a tax on all worker’s pay of 10% that would fund health insurance. The government will cover the less fortunate in our society with a competitive and subsidized HMO plan. Participation would be on the same basis as food stamps and the criteria will be financial need. The worker merely is required to pay 10% of their wages to participate. All other workers will be able to purchase plans based on ability to pay.
And… that’s about it. There are other areas not addressed, such as life insurance, gambling, and foreign earned income, which would also need to be considered. But this simple plan would solve many problems, including unreported revenue; now there would be no incentive to cheat because taxes are paid for goods or services purchased. Goods purchased would carry tax stamps or bar coded stamps to ensure compliance.
The United States had $14.7 trillion of gross national product in 2008. This simple tax structure will create jobs, increase government tax revenues and will create a fair tax.
Your thoughts?
By: Larry Goldsmith, J.D., C.P.A., C.F.F.A.
Partner at CJBS, LLC
In these difficult economic times, there will be many businesses that will no longer be able to meet their current obligations. Their lenders will refuse to advance additional capital and the financial pressures will force the closely held business owner into Chapter 7 bankruptcy. There are better alternatives than bankruptcy, but your lender and trusted advisors may not tell you about these options.
Bankruptcy is not always the answer for many business owners who have decided to liquidate their distressed businesses. Upon filing Chapter 7 bankruptcy, an overburdened bankruptcy court system appoints a Chapter 7 trustee to manage the case. The trustee’s duty is to investigate if the owner is guilty for the business’ failure. He also investigates whether preferred customers, or the owners, received fraudulent transfer payments or preferences during a period that in the State of Illinois may deem as long as four years from the date of the transfer.
The system is flawed because bankruptcy is a slow and costly process. The trustee often has many cases and is fortunate to close a case and sell the assets within a year or two. During such time, the business and its assets could have lost much of its value to potential purchasers. The bankruptcy process also invites litigation. Litigation is expensive and has a tendency to diminish the proceeds from the sale of the assets. Litigation against former owners is common.
An Assignment For The Benefit of Creditors, known as an ABC or an assignment, is a common law remedy governed by state law. An experienced professional, known as an ‘assignee,’ is appointed by the corporation’s board of directors to take charge of the business assets and to liquidate the business and its assets to pay the creditors of the failed business. The assignee’s goal is to quickly take complete control of the business and its assets and then determine the best means of selling the business, either as a going concern or sell the assets at auction. Then the assignee, as the fiduciary for the creditors, determines which creditors get paid and in what priority.
The assignee has a flexibility that the bankruptcy trustee does not have or may not be willing to assume either because of liability issues or because of the administrative problems associated with the Federal Bankruptcy Court. To maximize the return to creditors, an assignee may decide to employ former employees or owners to run the business in the short term because a going concern can be sold for greater dollars than an auction of unused machinery and inventory. The assignee will then try to collect all of the receivables and sell all of the assets within months of his appointment.
There are no back room deals or midnight sales in a properly administered assignment. The assignee is required to notify the creditors upon receiving the assignment. At the close of the assignment, the assignee will send out a final letter and accounting to all creditors. The assignee will then publish, with at least ten days advanced notice, where and when the assets are to be sold in the local newspaper. If there are related purchasers or initial bids for the assets, the assignee should disclose these matters to the public and creditors. The assignee is most productive if there is a working relationship with both the creditors and the former business owners.
AN ASSIGNMENT IS A BUSINESS SURVIVIAL OPTION
If the business is inundated with both secured and unsecured creditors and the lender is unable or unwilling to advance additional capital to permit the company to meet its current obligations, potential equity investors will not want their monies to be used for paying the old debts of the company. The equity investor will want their capital to be used to grow the company and grow its profits. The equity investor may recommend that the business be sold in an assignment for the benefit of creditors. The new equity investor forms NEWCO to purchase the assets of the old business in an advertised sale. In many cases, the assets of the company have a fair value which is less than the secured creditor’s security interest in the assets of the company. NEWCO may be able to acquire all of the business assets of the former company by working out a deal with the secured creditor. Newco has the assets of the old company without the old company’s obligations, creating a fresh start.
Now the equity investor’s actual capital can be used to grow the business and grow the profits in the new company. Former employees may be offered new positions with the new company, former owners may have an interest in the new company and the business will continue as a going concern benefiting both society and the local economy. The creditors of the old company receive just as much, if not more, than they would have received had there been a Chapter 7 bankruptcy.
For the closely held business owner, having a failing business is a nightmare. Business friends are calling the office and the owner’s residence demanding immediate payments. Threatening letters greet the owner at the office. Letters promising quick fixes are delivered daily. The business owner does not sleep. He prays that they will be able to cover the next payroll and hopes that there are sufficient funds for the payroll taxes. Sadly, too often the secured creditor has the business owner’s residence as additional collateral, compounding the owner’s fears.
The assignment brings greater peace to the business owner than a bankruptcy. The assignee communicates with creditors when the assignments begin and often the creditors will cease the harassing telephone calls. The speed of the assignment is able to put an end to an ugly chapter in the business owner’s life quickly, without protracted years in bankruptcy court with court appearances, depositions and creditor meetings. Since assignments are more cost efficient and can result in a greater return to the creditors, there is greater likelihood that secured creditors can be satisfied and personal assets can be saved from the demise of the business. The former owner can help the assignee to collect receivables and maximize the proceeds to the creditors, which is an additional advantage to why the assignment for the benefit of creditors has been a successful legal tool for so many informed business owners.
Larry Goldsmith is an attorney, Certified Public Accountant and a member of CJBS, an accounting and financial consulting firm in Northbrook, Illinois. Larry has been in active in performing Assignments for the Benefit of Creditors, as an assignee for over fifteen years. Larry can be contacted via email at LARRY@CJBS.COM, or by telephone at 847-580-5427.
