WHAT HAPPENS WHEN A CORPORATION DOES NOT PAY THEIR PAYROLL TAXES?

When a corporation has unpaid payroll taxes, those who are responsible for the payment of the tax will be held personally responsible for 100% of the employee share of the tax.  This is called Trust Fund Recovery Penalty.  A responsible person is defined as a person who (1) is aware of the payroll tax liability, (2) has the ability to pay the tax and (3) acted willfully not to pay, regardless of the reason.  This “Penalty” will be assessed when it is determined the corporation is either unwilling or unable to pay the tax. The person could either be an officer, board member or even the bookkeeper.

In most cases the IRS will assume all officers and board member are responsible persons [regardless of the facts and circumstances] and will automatically assess 100% of the trust fund penalty against each officer and board member.  Generally an officer or board member will need to go to court to show they are not a responsible person.  Except in bankruptcy proceedings, before the individual is eligible to go to court they first need to pay the Trust Fund Penalty, and then sue in court for a refund.

An example of this is in the court case of Skoczylas v. the U.S. [Skoczylas v. USA, 09 Civ. 2035 (ILG) (RML), NYLJ 1202582026679, at *1 (EDNY, Decided December 3, 2012)].  The IRS automatically assessed the Trust Fund Penalty against a board member but in court was denied summary judgment and awarded the board member a refund.  Even though the individual was a director of the corporation, material fact issues remained as to whether she was responsible person who acted willfully with regard to corporation’s tax debts. Although she was director, she didn't manage corporation’s day-to-day affairs and lacked decision making authority over paying debts even though she had some check-signing authority.  In addition it was unclear as to whether creditors ran the corporation during bankruptcy and/or if she had actual control over the checkbook and bank accounts.  It was also undisputed that the CEO was a responsible person who acted willfully.

Please contact this office if you have any questions or need assistance.

NEW PENALTIES FOR FAILURE TO FILE INFORMATION RETURNS

Tax law requires businesses to provide information returns, such a 1099s, to each payee that the business has paid $600 or more for the year. The law also includes penalties for failure to file the same information returns with the IRS.

To ensure compliance with these requirements, there are substantial penalties, and, as part of the recently passed Small Business Jobs Act of 2010, those penalties have been doubled. The penalties are generally based upon how late the returns are filed with the IRS or provided to the recipient of the income and are broken down into three tiers:

Tier 1 – Where the returns are filed or provided late but within 30 days of the prescribed due date.

Tier 2 – Where the returns are filed or provided more than 30 days after the prescribed due date and before August 1 of the calendar year in which the filing was required.

Tier 3 – Where the returns are filed or provided after August 1 of the calendar year in which the filing was required.

In addition, the maximum penalties for the year are based on business size determined by the business’s gross receipts. Businesses with gross receipts of $5 million or less are subject to the small business penalty maximums.

In addition, the minimum penalty for each intentional failure-to-file act increases from $100 to $250.

Rental Owners Included in the Reporting Requirement Effective in 2011 – Effective for 2011 filings due in 2012, the 2010 Small Business Act provides that solely for purposes of filing information returns, a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. The new law does provide the IRS with the ability to permit exceptions to the filing requirement for hardship cases and when minimal rental income is received, but neither “hardship” nor “minimal” are yet defined.

In order to comply with these requirements and avoid these substantial penalties requires collecting the payee’s name, SSN number and contact information before making payment. If you need assistance setting up a procedure for collecting the required information or filing your information returns for the year, please give us a call at 562-912-4334