Business Taxes

PREP STEPS FOR BUSINESS TAXES

Various Business Taxes

The IRS sends "Return Error" Notices to Businesses in the same way they send them to Individuals. They impose various penalties for late filing, late payment and return errors. (See IRS Notice CP215 or Notices CP141I, CP141L & CP141C). The IRS will warn you to make electronic deposits or face penalties with Notice CP248 along with various warnings about your schedule of deposits (See Notice CP236).

The problem with these penalties is that the IRS looks for technical violations in order to impose a penalty. Often, the business must pay it or go out of business. However, the IRS may grant a "one-time" penalty abatement using Notice CP235.

However, with help from our offices to properly prepare, you should receive a Letter 2057C for relief from liability for Form 941 & W-2 penalties, a Letter 3786C for relief from Form 940 penalties or a Notice CP141R for relief from Form 990 penalties.

If the business has overpaid, the IRS will send Notice CP267 asking where they want the credit applied.

However, these "Return Error" and Penalty Letters are not "Audits". An audit is an examination of the company books and records.

Income Tax Audits

A C Corporation is more likely to be ensnared in an IRS income tax audit than an S Corporation because an S Corporation's profits & losses are passed through to the shareholder(s). Only if the shareholder is being audited would the S Corporation be audited. A C Corporation's income can be audited independent of the owners. Please see the Audit Prep Steps.

Independent Contractors vs Employees

In many industries such as construction, life insurance sales, real estate sales, law, CPA's, doctors, Internet & technical jobs, etc. it is common for the workers to be "independent contractors" who have many customers or are simply working on a single project and are not meant to become permanent employees.

However, it is also common for employers to label their workers as "independent contractors" in order to avoid paying for Worker's Compensation Insurance, Health Benefits, Unemployment Insurance & other employment benefits which would be owed to employees.

Therefore, the IRS & many States have joined to audit worker classifications of employers. If it is found that the employer has mislabeled employees as independent contractors the employer will be unilaterally assessed the FICA tax on all the employees. This will effectively ruin the business. Of course, any number of Appeals are available but once the IRS starts making assessments for mislabeled workers the only real options are to pay it & seek a refund or go out of business.

In fact, the IRS solicits for employees to complain about their status by filing Form SS-8 so the IRS can initiate an investigation of the employer. (See Pub. 1779). They have a webpage & a Form 8919 to calculate the amount of FICA which should have been withheld from & paid by the employee.

The IRS has a definition of "Independent Contractor" but it essentially is the common law definition which focuses on control. The more control the business has over the worker the more the relationship appears to be employer/employee. (See IRS page)

If the business agrees the workers were misclassified, endless Appeals will be futile. But, to compound the problem, once the IRS assesses the FICA taxes on the business they will look to the owners for the fiduciary Trust Fund Recovery Penalty as explained next.

Be careful to send the IRS the correct social security numbers (or ITIN's) for the workers. If the business sends the IRS incorrect Social Security numbers for the Independent Contractors the IRS will send Notice CP-2001A asking them to correct the problem or face fines.

Fiduciary Taxes

In addition to the various state & local taxes imposed on businesses, the IRS requires employers to withhold income taxes from employees & withhold 1/2 of the required FICA payments. The corporation owes the other 1/2 of the FICA. The business & the Responsible Person has a duty to pay the money withheld to the IRS. Form 941 is used to report the withholding & payments. Form 940 is used to report & pay FUTA (unemployment).

If you make a mistake or need to correct a filed Form 941, the IRS will send you Letter 4384C.

If the IRS audits a filed Form 941 or Form 940, they use Letter 4108 to inform you of the audit. Adjustments are reported to you on Form 4666, Form 4667 & Form 4668. You have the opportunity to respond with Form 13683. The IRS will invite you to agree & sign Form 2504. Please DO NOT sign this without legal advice.

Then, after an audit & the tax is assessed against the business the IRS will start collecting. The initial IRS investigation focuses on what assets of the business can be liquidated to pay the taxes. Then, the IRS looks to the assets of the owners. You will be required to comply with IRS demands (Form 9297), or risk a business shut-down.

Required Forms

Essentially, the IRS will want Form 433B for the business and Form 433F or Form 433A for the owners & Responsible Persons. Plus ALL the supporting evidence must be included. This is an extremely tedious task. But, fortunately we have designed Webinars for you to properly & fully complete these forms to win against the IRS!

The most common problem is when an employer withholds FICA and Federal income tax from employee wages but fails to give the money to the IRS with Form 941. Since an employer has a  fiduciary duty to give the money to the IRS, any Responsible Person is personally liable if the employer doesn't pay.

Responsible Person

Usually, this responsible person is the business owner or anyone with control over the bank accounts. The tax is called a Trust Fund Recovery Penalty. If the business organization is a Schedule C (Self-Employed or Single member LLC) then the Responsible Persons are personally liable for the entire unpaid tax (withholdings + FICA). But, if the business structure is a corporation (S or C) then the Responsible Persons are only personally liable for the unpaid employee withholdings plus 1/2 of the FICA tax.

Also remember that, although the "responsible person" is liable for the Trust Fund Recovery Penalty, they are not liable for the taxes of the Corporation. The Corporation is a separate entity and bears its own liability. The Responsible Person and the Corporation are each jointly and severally liable for the Trust Fund Recovery portion but the Corporation alone is responsible for its own taxes.

State Law Remedy

Further, the situation often occurs where former owners, managers and other potentially liable Responsible Persons fight with each other over who is going to pay the tax. However, since each person is jointly and severally responsible for the penalty the IRS can collect from any one (or more) of them, without regard to their individual claims against another responsible person. These responsible persons can sue each other in State Court for an apportionment of liability but the IRS doesn't care.

Procedure

You will initially receive Letter 1153 and/or Letter 3164 A stating that the IRS is proposing to assess the Trust Fund Recovery Penalty. You have 60 days to Appeal within the IRS administrative agency. The IRS conducts interviews of all persons the IRS believes may be a responsible person. See Form 4180. But, the questions in these "interviews" are designed to prompt you into admitting you are liable.

They may ask you to admit personal liability by signing a Form 2751. DO NOT SIGN THIS WITHOUT LEGAL ADVICE! But, whether you cooperate or not in the IRS investigation, they will unilaterally determine the tax against anyone with signatory control over the business bank account, amongst other factors.

Take Action

You can Appeal the assessment within the IRS Agency. But this is often futile because the traditional method of fighting a fiduciary tax is to pay the tax first, then request a refund. See Form 843. All arguments must be included or waived on the Form 843. The IRS will ignore your Claim for Refund and after 6 months you can sue the USA in US District Court to get a hearing. You will bear the burden of proving you do not owe the tax.

If you Appeal the IRS determination within the IRS administrative agency & lose, you still can sue the USA in US District Court if you pay the tax (or a portion). But, it is often best to skip Appeals & immediately file a claim for refund to get into Court. This is because the Court holds Equitable powers over the IRS when they cannot (or will not) restrain themselves. IRS employees have no compulsion to overturn themselves. Only the Court can fairly review your case.

Investigation

Obtaining the reasons exactly why the penalty has been asserted can be difficult. Often, a Freedom of Information Act Request is necessary (FOIA). See Guide & Requirements.

The IRS now has 2 (or more) persons liable for the tax: 1) the Business & 2) the Responsible Persons. If the debt is too high the business often closes, leaving the Responsible Persons to fight the IRS (& amongst themselves).

This is the worst type of tax problem. Although the collection statute of limitations still applies the debt is non-dischargeable in bankruptcy and the IRS is much less inclined to accept an Offer in Compromise. Especially since the IRS had to credit the employees for taxes never paid. Essentially, the Responsible Persons have stolen the withholdings from the IRS.

Be Determined

So, your situation requires delicate negotiation and tactics by the tax lawyer to confront the IRS. Your personal situation will vary over the years so patience is necessary. You must react with a clear but flexible strategy designed by a tax attorney.

Please DO NOT complete any questionnaires for the IRS until you've met with Mr. Hopkins. What you say in writing WILL be used against you!!

If the IRS has issued a levy against your company, your wages or your bank accounts, please follow the above Steps and the Prep Steps for IRS Collections.