How To Get Caught Up On Payroll Taxes

Sometimes a business will fall behind on paying their payroll taxes to the IRS, the State Department of Revenue or both.  This can happen due to software issues (i.e. believing things are being filed when they are not) or some other reason.  However, a  more common reason is when business owners experience tight cash flow periods and decide to stop paying their payroll taxes.

If you are reading this post and find yourself in the position of owing back payroll taxes, we encourage you to heed this advice:

Read this post in it’s entirety, and IMMEDIATELY do something productive to deal with your matter. Don’t schedule time to work on it later; do it NOW.  Our point is that in order to successfully solve your problem, you MUST confront it.  So, make a phone call to the state, put funds aside for a payment toward your unpaid balance, complete one of the missing returns, and put it in an envelope to mail with a stamp on it, etc. Just DO something, right now.

Consequences when you don’t file or pay your payroll taxes
Here are some things you can expect to happen when you don’t file or pay:

  • Penalties –  If the payroll tax return is filed late, the IRS will fine you a percentage of the balance of the return once it is eventually filed.  Once the return(s) is filed, if you haven’t paid the associated taxes, the IRS will impose a penalty for not paying within the time frame listed on the notices they sent you.  This post on how to  deposit payroll taxes will outline how some of the penalties are calculated.
  • Interest –  The IRS will charge the business interest on all unpaid balances and unpaid penalties until they are paid in full.
  • Tax lien –  If you owe enough, the IRS will eventually file a tax lien to protect the US Government’s interest.  This basically means that the IRS gets first dibs on your assets if you try and sell the business or file bankruptcy.  This is done as a procedural matter, even if you get your act together and set up a payment plan.
  • Tax levy –  If the business is seriously behind and has been avoiding the IRS, they could a random day of the week, take a look at your bank account and seize what you owe them. This is one reason why avoiding the problem is NOT a good idea when it comes to payroll tax problems.
  • State issues –  In addition to what the IRS can do, your state can do that and more.  Because LLCs and corporations are regulated at the state level, the state has a few more weapons in its arsenal. They can dissolve your LLC or corporation, deny your operating licenses, and in extreme cases, show up at your place of business and physically shut it down.

How to fix the problem
Here are the steps that one will want to take to address the problem once and for all:

  • Don’t Ignore It –   The IRS taxes payroll tax issues VERY seriously.  Why?  Because the taxes that you are supposed to send to them are held in “trust” for your employees.  What we mean is that your employees “trusted” you do send them to the IRS.  So when you don’t, the IRS gets really mad and will come after you harder/faster than if it was just an income tax matter.  So if you want your life to stay headache free, deal with this issue now!
  • File any unfiled returns and make current deposits – File all unfiled returns with the IRS and your state tax authorities ASAP.  Also make sure that you are making your current deposits on time.  It goes a long way when you eventually talk to someone at the IRS and they can see that you are paid up on your current returns and are just dealing with older returns/balances.
  • Follow the IRS Deadlines – When the IRS gives you deadlines for completing returns, submitting documentation, making payments, and other matters, it is critical that you do not ignore these dates. Failing to comply with the deadlines could put your business in jeopardy of being shuttered and you being heavily fined.  To protect valuables like company equipment or accounts receivable, you should abide by the deadlines the IRS gives you.
  • Be prepared to complete IRS Form 433-B – IRS Form 433-B is used to obtain current financial information necessary for determining how a business can satisfy an outstanding tax liability.  With that said, you should familiarize yourself with the form as the IRS will probably ask for it once you start to correspond with them.
  • Set up an installment agreement –  Once the Form 433-B is completed, it will indicate how much money the business has left to pay towards the taxes it owes.  At that point it’s just a matter of reaching out to the IRS (call or write them) and setting up the payment plan.  Now we’re sure that some of you will ask “but what about applying for an offer in compromise?”  Well, just know that if your business is still in operation, an OIC will more than likely NOT happen (the IRS doesn’t like to cut “forgiveness” deals with operating businesses).

Do You Have Payroll Tax Issues?
Have you failed to file payroll tax returns, make payroll tax deposits or received an IRS notice that you don’t know how (or want) to deal with?  Give us a call at 844-829-3788 NOW to put us to work for you.  We can help you resolve your payroll tax matters so you can get back to running your business.

Depositing Payroll Taxes

As an employer, it is your responsibility to deposit federal income tax withheld for your employees pay as well as both the employer and employee portions of social security and Medicare taxes.  However when are you to make the deposits and how do you make them?  Also, what are the penalties for making deposits late?  Well, read on my friend to learn the answers to your questions.

When To Deposit
There are two schedules for determining when you deposit payroll taxes.  These schedules (monthly and semi-weekly) tell you when a deposit is due after a tax liability arises (for example, when you have a payday).  The deposit schedule you must use is based on the total tax liability you reported on IRS Form 941 during what is known as the  lookback period.  Your deposit schedule isn’t determined by how often you pay your employees.

So what is the lookback period?  If you’re a Form 941 filer, your deposit schedule for a calendar year is determined from the total taxes reported on Forms 941, line 10 (line 12 for quarters beginning after December 31, 2016), in a 4-quarter lookback period. The lookback period begins July 1st and ends June 30th.  If you reported $50,000 or less of taxes for the lookback period, you’re a monthly schedule depositor; if you reported more than $50,000, you’re a semiweekly schedule depositor.

For example, the following would be the lookback period for calendar year 2019:

  • July 1, 2017 – September 30, 2017
  • October 1, 2017 – December 31, 2017
  • January 1, 2018 – March 31, 2018
  • April 1, 2018 – June 30, 2018

Now what if you are a new employer?  Your tax liability for any quarter in the lookback period before you started or acquired your business is considered to be zero.  Therefore, you’re a monthly schedule depositor for the first calendar year of your business.

Monthly Deposit Schedule
Under the monthly deposit schedule, an employer deposits employment taxes for payroll made during a month by the 15th day of the following month.  So for example, the payroll taxes for you August payroll would need to be deposited by September 15th.

Semiweekly Deposit Schedule
Under the semiweekly deposit schedule, deposit employment taxes for payrolls processed on Wednesday, Thursday, and/or Friday by the following Wednesday. Deposit taxes for payments made on Saturday, Sunday, Monday, and/or Tuesday by the following Friday.

How To Deposit
You must use the Electronic Federal Tax Payment System (EFTPS) to make your deposits.  If you don’t want to use EFTPS, you can arrange for your tax professional, financial institution, payroll service, or other trusted third party to make the deposits on your behalf.  FTPS is a free service provided by the Department of Treasury.  To get more information about EFTPS or to enroll, you can visit the EFTPS website or call 1-800-555-4477.

If you’re a new employer that indicated you might have payroll tax liabilities when you requested an EIN, you’ll be pre-enrolled in EFTPS.  You’ll receive information about Express Enrollment in your Employer Identification Number (EIN) Package and an additional mailing containing your EFTPS personal identification number (PIN) and instructions for activating your PIN. Call the toll-free number located in your “How to Activate Your Enrollment” brochure to activate your enrollment and begin making your payroll tax deposits. If you outsource any of your payroll and related tax duties to a third party payer, such as a PSP or reporting agent, be sure to tell them about your EFTPS enrollment.

Deposit Penalties
If you don’t make required deposits on time or if you make deposits for less than the required amount, you might be subject to penalties. The penalties don’t apply if any failure to make a proper and timely deposit was due to  reasonable cause and not to willful neglect.  If you receive a penalty notice, you can provide an explanation of why you believe reasonable cause exists.

For amounts not properly or timely deposited, the following penalty rates apply:

  • 2% – Deposits made 1 to 5 days late.
  • 5% – Deposits made 6 to 15 days late.
  • 10% – Deposits made 16 or more days late, but before 10 days from the date of the first notice the IRS sent asking for the tax due.
  • 10% – Amounts that should have been deposited, but instead were paid directly to the IRS, or paid with your tax return.
  • 15% – Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you received notice and demand for immediate payment, whichever is earlier.

Do You Have Payroll Tax Issues?
Have you failed to file payroll tax returns, make payroll tax deposits or received an IRS notice that you don’t know how (or want) to deal with?  Give us a call at 844-829-3788 NOW to put us to work for you.  We can help you resolve your payroll tax matters so you can get back to running your business.

Why People Fall Behind On Their Taxes

According to the latest Internal Revenue Service Data Book, there were approximately 14 million delinquent tax accounts at the end of 2016.  The total associated tax balances for those accounts, including the assessed balance, penalties and interest equaled a staggering $138.2 billion!  So why do so many people fall behind on their taxes?  We’ve probably heard every reason under the sun from “I got scared” to “I just forgot to file.”  However, most reasons will typically fall into 4 broad categories.

Underwitholding
When you work a job, you’ll typically tell the employer to withhold taxes from your paycheck. However, if enough taxes aren’t withheld from your paycheck throughout the year, you, the employee, will likely owe the IRS when you file your tax return. The IRS refers to this phenomenon as “underwithholding.” It’s usually triggered when an employee claims excessive exemptions on his or her IRS Form W-4 that results in not having enough income tax withheld throughout the year. We sometimes also see this when an employee tries to get too much money in their check by claiming “exempt” on their W4 and either 1) becoming too accustomed to those nice take home checks or 2) they forget to switch it back before the year ends.

The main takeaway with underwitholding is to know that you can file a new W-4 at any time. What’s even better is that if you find that you’ve given too much to the government, you’ll get the money back when you file your income tax return!

Not Making Estimated Tax Payments
In this post, we talk about the groups of people that tend to have the most IRS debt. Essentially, those who are self-employed do not have an employer to withhold taxes from their paycheck. Thus, they are responsible for paying their own taxes on a quarterly basis via the estimated tax payment process. But if you fail to make your estimated tax payments throughout the year (or contribute enough), you’ll likely incur a large tax liability at the end of the year. All it takes is one or two years of not paying enough on your taxes as a “sole-proprietor” and your tax debt can very quickly get out of control.

Life Events or Disruption
Sometimes life simply gets in the way of one filing their taxes. A death in the family, illness, cancer, divorce, or a loss of job can all keep a person from performing their normal compliance requirements. The main thing to remember is that once that disruption has passed, it is best for one to get compliant and file their missing returns as soon as possible.

Other
This is pretty much the catch all for everything else ranging from “fear” to thinking that one did not have a filing requirement.  We’ve seen instances where a taxpayer falls behind with filing a year or two.  Then because of “fear” they decide to not file going forward.  We’ve seen people who sometimes have not filed for 5, 10 even 20 years!  Conversely, some taxpayers don’t file a return because they didn’t think they needed to when it turns out they did.  For example, we had one taxpayer who knew they didn’t have to file a tax return with the state because their sole source of income was from retirment sources (which weren’t taxed by the state).  But unfortunately, they took this to mean that they did’t have to file with the IRS as well.  So they didn’t…for 8 years.  Needless to say, this turned into a $60K+ tax debt.  It was eventually resolved, but not without a lot of work and we’re sure some very sleepless nights!

Bottom Line
People fall behind on their taxes. If the IRS thinks you owe them money, they will try and get your attention with a few letters, maybe a phone call or possibly a visit to your job or home. If those things don’t work, then they will take enforced collection action which can include liens, levies, garnishments and the like.

Our suggestion? Try your best to not owe the IRS in the first place. Focus on being self-motivated/proactive and educate yourself on your tax reporting and payment obligations. If you are unsure about them, get a hold of a tax attorney, CPA, Enrolled Agent, professional tax preparer or even the IRS itself.

What if it’s too late and you already owe the IRS? Reach out to the same folks listed above (including us of course) and ask them how you can become compliant ASAP!

The Truth About Settling Tax Debt For “Pennies On The Dollar”

The most overused, deceptive, tax relief advertising catch phrase!

The most overused, deceptive, tax relief advertising catch phrase ever!

It is not uncommon for taxpayers to contact us and tell us that they want to apply for “that program” where they can settle their debt for a fraction of what they owe.  They will often tell us that they saw some ad, web site, or a salesmen told them that they could settle their tax debt for some fixed percentage or a fraction of what they owe. However, this is blatantly incorrect. There is no (absolutely no) provision in the tax code for allowing a taxpayer to pay some set percentage of their tax liability and just calling it good. It has never existed, and most likely never will.

So what exactly does “pennies on the dollar” refer to? It is a reference to the IRS Offer in Compromise (OIC) program, which allows eligible tax debtors to pay the IRS an amount of money that is less than what they owe in order to wipe out their entire tax liability.

The phrase “pennies on the dollar” was actually determined several years ago by the IRS to be a form of deceptive advertising, and they explicitly instruct licensed practitioners that the use of this phrase is a violation of Circular 230, which is the practitioner behavior handbook for working with the IRS. However, since the IRS doesn’t have jurisdiction over firms that just market these services, it comes into the FTC’s purview to look out for these deceptive marketing practices.

In advertising, you’ll hear companies talk about settling for 20%, 10%, or even less. These ads, and the sales people you talk to on the phone, are trying to sell you an OIC service package. Many of their web sites even have little interactive calculators where you type in how much you owe the IRS, and it’ll spit out a, “You may only have to pay $xxx” message.

Instead, the amount of your OIC settlement is calculated using a very, very strict formula… and that formula is NOT secret — it’s available on a worksheet in IRS publication 656B.

Based on this formula, if you have equity in assets that exceeds your tax debt, you simply don’t qualify. Period. End of story. For most individuals, the common thing is going to be equity in your house or rental properties, or perhaps equity in a collection of classic cars, stamps, coins, guns, art, etc. If the value of ANY of that stuff is greater than your tax debt, you do not qualify for the OIC program  – there is no way around this.

In the same vein, if you are a high income earner, it’s also highly unlikely you will qualify for the OIC program. The reason for this is that the IRS only allows certain amounts of money every month as “eligible expenses” for housing, cars, food, etc. If your lifestyle exceeds these amounts, the IRS doesn’t care — they will only allow you to claim the National Standard expenses. Any monthly income over those amounts gets multiplied by either 12 or 24, and THAT number goes into your offer amount.

In these circumstances, you may qualify for a period of up to 12 months to make a “lifestyle adjustment,” and reduce your living expenses to come into line with IRS standards. This will often involve selling luxury homes and getting rid of toys such as cars and boats. Keep in mind that these items are all covered by your tax lien, so any proceeds from the sale of these items technically is owned by the IRS, and should be paid over to them. A good tax representative can assist you with structuring these sales so that both you and the IRS get something out of it.

Beware of anybody promising that your tax debt can be settled for some fixed percentage of the debt. That’s not the way it works, and never has. Anybody trying to sell you on that idea is OUTRIGHT LYING TO YOU, and you should seek assistance elsewhere.

Do you need help with a back tax matter?  Visit our Got IRS Debt page and enter your information in the box on the left for a FREE 30 minute Tax Debt Settlement Analysis.  This analysis, valued at $197, will look at your situation and tell you what IRS programs you qualify for to settle your IRS headaches once and for all. Alternatively, you can simply call us at the number in the upper right portion of this page and we’d be happy to schedule an appointment time for you.

2014 IRS Collection Statistics

IRS Stats

The U.S. Internal Revenue Service is the single largest collections agency in the world. We always find it kind of cool to analyze the collections data that is released every year. It always provides some insight into what is going on in the “delinquent” or “unfiled” tax return world. Since filing old tax returns is what this site is all about, here are some interesting tidbits from the most recent statistics available:

Budget & Personnel
In 2014 the IRS spent $11.6 billion and employed just over 84,000 to collect more than $3.1 trillion in tax revenue. Of those 84,000 personnel, over 18,000 are directly involved in enforced collections against taxpayers that owe back taxes.  In 2013 the IRS spent $11.6 billion to collect $2.8 trillion in tax revenue, using just under 87,000 employees, of which 19,000 were involved in enforced collections.

Delinquent Tax Return Inventory
In 2014 the IRS began with 11.7 million delinquent accounts (unfiled returns).  7.6 million new cases were added to inventory while only 6.9 million were closed.  This put the ending inventory at 12.4 million returns.  In 2013 the IRS saw 7.7 million new cases added to inventory but they were able to close 7.5 million.

Examinations
In 2013 there were 145.2 million individual tax returns filed, of which 1.2 million were selected for review (audit) in 2014.  Thus the effective audit rate was 0.9%.  Of those returns examined, the IRS proposed changes in 87% of them with an associated $11.8 billion increase in taxes owed.  For the returns that were reviewed in 2013, the audit rate was 1%, the IRS proposed changes in 89% of what it reviewed with an associated tax increase of $14 billion.

Enforcement
In 2014 the IRS filed 535 million Federal tax liens against taxpayers.  This was a 11% decline when compared to 2013.  Likewise, 432,000 seizures were conducted, which was down 21% from the prior year.  However, 1.9 billion levy notices were filed against taxpayers which was a 7.6% increase over 2013.

Offers In Compromise
In 2014 the IRS received 68,000 offers where taxpayers attempted to settle their tax debt for less than what was owed.  Of that number, the IRS accepted 27,000, which was a 12.9% decline from what the agency accepted in 2013.

What Does This All Mean?
The summary version of the above is that:

  • IRS budget cuts are forcing the agency to collect more tax revenue (current and delinquent) with a reduced staff
  • While the number of “new” unfiled returns added to inventory is increasing, the IRS isn’t able to close the gap on the case load
  • The IRS is examining fewer returns and enforced collections are down
  • All those commercials touting that you can settle your taxes for “pennies on the dollar” apparently don’t want you to read the IRS Consumer Alert about such statements.  They also don’t want you to know that the IRS only accepts less than approximately 45% of the offers it receives

We always tell our clients that while the IRS may be slow, they eventually do catch up with you.  If you are facing a tax problem, please know that “hoping” it will go away is not the answer.  The last thing you want is for the IRS to reach into your bank account on grocery day and take everything you’ve got in the account because you didn’t respond to the dozens of letters they sent you.  Didn’t get the letter?  The IRS doesn’t care because from their viewpoint, just because you  didn’t get it, didn’t mean we didn’t send it!

We’re always here to help you out.  So if you’d like to discuss your situation or want to file any of those “delinquent” returns you’re sitting on, feel free to give us a call at the number listed in the upper right or shoot us an email to the address listed in the footer of this page.