This is part three of the Do not let your taxes snowball out of control series. Name and location changes to protect client confidentiality are in effect. See Part One relating Sally’s real life tax example and Part Two George’s real life tax example.
Tim is a doctor. He owns and operates a chiropractic firm. The firm has several employees. Prior to 2001, the firm was performing well. However, Tim tended to use most of his expendable cash and saved very little. His firm earned sufficient profits, and he could afford to travel. He also enjoyed purchasing big ticket items, such as a classic Corvette and a lake house. Tim relied solely on his chiropractic firm to support his lifestyle.
When 9/11 hit, business significantly slowed down, and the firm was barely breaking even. Tim cut down on some of his personal spending to keep the firm afloat. The firm financially struggled for 2 years before things started to turn somewhat better.
By about 2004, new competition entered his market. The new competitors had an immediate impact on his business. Even worse, Tim’s business never fully recovered compared to the pre-9/11 days. Tim did whatever he could to keep the business going. To pump some cash into the business, he got a business loan using his main home and lake house as collateral.
When the 2008 recession hit, business got increasingly worse. There was barely enough cash to pay vendors and payroll. Tim made some tough decisions to keep the business going. First, he let go an employee. But this was not enough. He was behind on some bills, and he still needed to take care of payroll. Tim determined that it was most important to take care of the vendors and his employees first. So Tim prioritized his vendors and employee wages, but did not pay the required payroll taxes. Tim would file his payroll tax returns, but paid nothing towards the balance due. Tim figured that he would pay off the delinquent taxes, penalties and interest over time.
Tim’s chiropractic business started to turn around for the better in 2011. However, he never caught up on the back payroll taxes. Also, he stopped filing payroll returns in 2010. He knew that this was a bad situation, but he figured that eventually he would take care of the taxes. He received some bills from the IRS asking for payment, but he set the bills to the side. He simply could not bear to look at the tax bills. At this point, the total amount of payroll taxes, penalties and interest owed was in the $200,000 range. This estimate did not include taxes owed for 2010 and 2011.
In December of 2011, an IRS Revenue Officer (RO) visited his place of business. The RO spoke with Tim and scheduled a meeting for later in the month to discuss his payroll tax debts. The RO also requested that Tim be prepared to discuss his personal finances.
Tim called ALG Tax Solutions for relief. The first thing we did was fax a power of attorney for Tim and his business to the RO. We then called the RO to discuss Tim’s case. During the call with the RO, we discussed the following:
1) The business is not compliant with its payroll tax obligations. The RO requested all missing payroll returns. We set a due date of mid-January 2012 for filing all past returns.
2) For now, all future payroll returns must be filed with the RO.
3) The business needs to start making payroll deposits. All payroll deposits must be provided to the RO. If the business decides to file the deposits electronically, then proof of electronic deposits must be provided to the RO.
4) Complete business financials must be provided to the RO by mid-January
5) The RO still wants to meet with the client to discuss Trust Fund Recovery Penalties. The meeting was rescheduled for mid-January. For the more information on Trust Fund Recovery Penalties, click here.
We fully reviewed the RO requests with Tim. He understood and wanted to fully cooperate. However, Tim was worried about whether the IRS would work with him due to the sheer amount of taxes owed. He was also concerned about keeping his business open. We provided Tim some assurance that the IRS will work with him based on business and personal finances. The following list of events then took place.
1) Tim started to make electronic payroll deposits in January.
2) We gathered Tim’s business books and prepared all missing returns. After preparing the returns, we estimated that the total amount of payroll taxes owed including penalties and interests was about $300,000. All the missing returns were filed with the RO.
3) Tim had his interview with the RO.
4) We prepared both personal and business IRS financial forms.
We reviewed the status of the case with the RO in early February. The RO did decide to assess Tim the Trust Fund Recover Penalty because neither Tim nor the business could afford to fully pay off the taxes owed in a relatively short period of time. However, we did negotiate reasonable payment terms to pay off the taxes over 6 years based on the personal and business finances. Tim could afford the payment terms, but it would be difficult. Overall, Tim was happy to get resolution of payroll tax issues behind him.
Do not wait until an IRS Revenue Officer visits your place of business before addressing back tax issues. At ALG Tax Solutions, P.C. we can help set up arrangements with the IRS as soon as you start missing tax payments. Call us at 855-MI-TaxHelp (855-648-2943).
IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.