KAF Group - Article: The IRS, Not the Place to Borrow Money

The IRS, Not the Place to Borrow Money

By Brian McCusker

Over the last two years we have seen an increase with engagements that have tax related issues. Companies, as well as individuals, often fall into a spiraling cycle of excessive interest rates, fees and penalties when they fail to make timely tax deposits for payroll related obligations. This frequently occurs when cash demands are overwhelming and payment decisions are made without fully comprehending the potential ramifications on the parties involved.

In addition, because the IRS is not calling daily, many companies elect to prioritize vendors ahead of the "Service" with the intention of "catching up" as cash flow improves. Making this option even more attractive is the fact that there is a time delay between required deposits going delinquent and the initial contact from the IRS. In most cases, a company will receive a written letter, which is often confusing, outlining the status of tax filings, taxes due, interest due and penalties assessed. Again, the absence of a direct contact tends to weaken the urgency of making the payment and is often ignored.

Failure to make timely payroll tax deposits may have a catastrophic impact on the long term viability of an organization. Failure to deposit "trust fund taxes", which represent withholdings deducted from employee wages, are considered the most egregious act by the IRS. Employers responsible for making payroll tax deposits are acting as fiduciary agents for the government and withholding taxes, or "trust fund taxes", are monies that belong to the employee, not the employer. In effect, by not depositing these monies, the Service considers this to be "stealing" from the employees.

In addition to the excessive penalties and interests that are assessed for delinquent tax deposits, the failure to deposit "trust fund taxes" carries personal exposure to the responsible parties and the obligations cannot be discharged in bankruptcy. In other words, these are obligations that are very expensive when ignored and do not go away until they are paid.

Beyond the concerns outlined above, there are also major reasons why you should never allow delinquent tax deposits to occur. These would include the following:

Tax liens can have serious consequences to a Company. In the event a lien is filed, a Company's lending institution will adversely react due to the potential of the IRS taking a priority position on the lender's collateral. This may result in the lender's unwillingness to fund the future working capital needs of the Company, thereby effectively putting the company out of business.
Tax levies are much more severe and allow the IRS to attach monies in bank accounts. Unlike other creditors, the "Service" has the ability to execute attachments in an expedient manner. These are severe actions which can impact the ability of a Company to continue its operations and be forced to close.
Credit reports are utilized by a number of business sources and can be the determining factor when issuing credit to an organization. Actions by the IRS will ultimately be reflected on an organization's credit report and will impact current, as well as future, business relationships.

We encourage all of our clients to maintain all of their payroll tax obligations in a timely fashion. In the event there is a problem and a taxpayer falls behind with their deposits, we would recommend the following course of action:

It is important to isolate the problem to a specific period, such as a quarter.
It is critical that current obligations are paid and remain current. Absent this, it is very difficult to procure cooperation from the "Service".
If necessary, a payment plan may be proposed to address the delinquent liabilities, however, this will require the submittal of Form 433-B, "Collection Information Statement for Businesses". It will be necessary to meet the commitments of any payment plan so be careful not to "over promise".
Another option for consideration would be the potential filing of an "offer and compromise". Dependent upon the circumstances it may be possible to negotiate a "discounted" resolution with the Service.
If all else fails, bankruptcy is an option, however, depending on the nature and classification of the obligations, it may only provide a taxpayer more time to address the obligation, not discharge it.

The bottom line is that taxpayers need to stay current with payroll related obligations. Failure to do so will create enormous financial and time burdens on an organization and could ultimately be the primary factor in the demise of a business. In the event you fall behind, address the problem in a focused and expeditious manner to limit the impact and avoid future complications.

Brian McCusker's expertise includes financial management, organizations restructuring, and tax strategies. He is experienced with the development and implementation of strategic operational plans including debt restructuring, financial analysis, and cash management strategies. Brian can be reached at bmccusker@tacticalsolutions-llc.com or by phone at 781-303-0017