Tax Controversy Lawyer Blog

For most taxpayers, the amount that they owe in taxes is pre-paid to the IRS through employee withholdings, amounts deducted by employers from each paycheck throughout the year. These withholdings are required to be paid to the US Treasury by the employer periodically throughout the year. But, for those persons who are self-employed, independent contractors and the like, paying federal income taxes to the US Treasury can often get put to the side.

Because the self-employed individual receives compensation directly from its customers, rather than the periodic paycheck that most people receive, the IRS requires self-employed persons to make estimated tax payments on April 15th, June 15th, September 15th and January 15th of the following year. Quarterly estimated tax payments must be made by a self-employed individual if he or she expects to owe at least $1,000 in tax for the current tax year.

A self-employed taxpayer is required to make the quarterly estimated tax payments in amounts which equal either 25% of 90% of the amount of tax due for the current year; or, in amounts equal to 25% of 100% of the amount of tax due for the prior year. As a result, many tax return preparers and tax return preparation software compute and provide quarterly estimated tax payment vouchers based on 100% of the previous years taxes. Taxpayers should use these vouchers to make their estimated tax payments.

For many reasons, taxpayers do not make proper estimated tax payments. Generally, the end result is a large tax bill on April 15. Some taxpayers will have the resources to pay the bill in full, many others will not. Either set of taxpayers will be charged an estimated tax penalty to compensate the government for the time value of money it lost when the estimated tax payments were not made.

Continue reading "Self-Employed? Just Do It...Four Times a Year!" »

A relatively common occurrence with many businesses, is a failure to pay over withheld income and employment taxes. Often cash-strapped businesses hope that conditions will improve and decide to use the withheld taxes as working capital to fund operations. The Internal Revenue Service and other taxing authorities HATE being an "unwilling participant in a floundering business".

In response to all too often finding itself as a unwitting lender, the Internal Revenue Service received authority from Congress in 1954 to assess personal liability against "responsible persons that willfully fail to pay over" withheld income and employment taxes.

The Trust Fund Recovery Penalty results in personal liability for 100% of the withheld income and employment taxes ("Trust Fund" taxes) for every "responsible person" assessed. While deemed a penalty, the Trust Fund Recovery Penalty is a collection device used by the Internal Revenue Service to recoup those taxes it has credited to other taxpayers. As such, the Service typically assesses the penalty against as many taxpayers as possible, to increase the odds of repayment. While this may seem to be unfair, it depends on who you ask.

Example: ABC, Inc. owes federal payroll taxes of $1,000,000.00, of which $750,000.00 are "Trust Fund" taxes. ABC, Inc.'s President, Vice President, Chief Financial Officer and Treasurer were all assessed the Trust Fund Recovery Penalty. As a result, each person assessed the TFRP owes the US Treasury $750,000.00, which accrues interest until paid. The IRS is prohibited from collecting more than $750,000.00 (excluding interest) no matter the source. So let's say ABC, Inc.'s President pays $500,000.00, Vice-President pays $225,000.00, and Treasurer pays $25,000.00. According to ABC, Inc.'s CFO, it seems like a good deal. All he owes is the interest.

Of course, the best course of action is not to count on luck. The best way to avoid this conundrum is to make sure the withholdings are deposited in the correct manner and on schedule. Don't make the mistake of failing to deposit: it can cost you more than just your business.

Continue reading "Employers Beware: Failure to Pay Employee Withholdings Can Result in Personal Liability" »

If you have ever been audited by the Internal Revenue Service, then you know audits are no walk-in-the-park. They can take a long time to conclude and that's not good for your nerves. However, eventually they do come to an end and the IRS will provide you with a copy of the Revenue Agent's Report and proposed changes. Luckily for taxpayers this letter is not the end of the road. You have 30 days to file a written protest as to why you disagree with the proposed changes. The IRS Office of Appeals will review your protest and the audit file and contact you or your tax controversy attorney to schedule a conference.

The function of the IRS Office of Appeals is to settle tax disputes, which typically arise in the form of proposed adjustments after an audit, in a more relaxed and informal way. The Appeals conference is conducted by correspondence, by telephone or in person. At the conference, you or your tax controversy attorney will meet with an Appeals Officer to discuss your return and make your case as to why the IRS erred in its audit of your return. The Appeals Officer, truly known for his or her neutrality, considers your position and may offer to settle your case right then. The trick to getting your way in Appeals is preparation, preparation, and preparation.

Continue reading "Think the IRS is Wrong? Appeal It - And Win!" »