Understanding IRS Reasonable Cause Criteria

Often times, when someone owes taxes that they haven’t paid for a few years, they are surprised when they find out how much the IRS says they owe.   This is because the IRS inevitably tacks on several of the dozens of penalties they are allowed to charge.   However it’s the late filing, the late payment and the penalty for not making Federal Tax Deposits (when combined) that can add a whopping 65% to your total IRS bill.  The good news is that if your tax debt is more than two years old, you’ve maxed out all these penalties!

The IRS does actually have a compassionate side, and it’s typically found in the penalty abatement process. The thing to keep in mind is that the IRS has very strict guidelines for granting penalty abatements, and these guidelines are referred to as “reasonable cause criteria.” 

The primary IRS penalty abatement reasonable cause criteria center on natural disasters, loss or destruction of vital business records, bad advice from the IRS or an accounting professional, criminal activity, medical issues, substance abuse problems, and other serious circumstances.  Thus, you are more likely to have your penalties abated if the circumstances cause you to answer “yes” to any of the following questions:

  • Were any business records lost or destroyed?
  • Were there any circumstances that led to a substantial drop in collecting on accounts receivable?
  • Was there any transition in the business that lead to the failure to pay taxes?
  • Was there a death or serious illness that directly affected the business or personal wages?
  • Was there any embezzlement of funds, theft of valuable property, or identity theft?
  • Were there any alcohol or drug abuse issues that affected the business or wage earning capability?
  • Was there a natural disaster that impacted you or your business?
  • Did you rely on the advice of a CPA or IRS employee in making tax decisions?
  • Were there any circumstances that created substantial financial hardship, to the point where your business was close to going bankrupt?

Specific Internal Revenue Manual (IRM) References

The sections of the IRM outlined below will help you see what the IRS will consider and how they evaluate each circumstances. Please note that this list is not exhaustive and that the IRS will consider the facts and circumstances on a case by case basis. The other thing to note is that if your initial request is denied, it might be approved via submitting an appeal.

In our next post, we’ll talk about how you can create your reasonable cause letter to the IRS and what it should contain.

5 Payroll Essentials Every Employer Should Know

Once you’ve hired your first employee, then you must make sure they get paid right? Well, we’ve seen some of the mistakes that employers typically make when they first start running payroll. This post will talk about the most important elements of processing payroll so that you don’t wind up in trouble.

Understand the labor laws.

As an employer, you must adhere to the federal, state, and local labor and employment laws. The federal Fair Labor Standards Act (FLSA) establishes rules for the minimum wage, premium pay for overtime, and protections for children who work. All employers should be aware of FLSA requirements as well as state and local wage and hour laws. One thing to be aware of is that they sometimes appear to contradict one another. For example, the federal minimum wage is $7.25, it’s $8.25 in Illinois and starting July 1, 2019 it will be $13.00 in Chicago. As such, you must always follow the provisions that are most favorable to your employees (i.e., pay $13 per hour if you’re located in Chicago). Most states have informative websites to help you figure out which laws apply. It’s a good idea to start there and then talk with a professional to make sure you’re following the right set of laws.

Establish your pay schedule.

Once your pay rates are determined to be in accordance with the laws, you then have to figure out how often to pay your employees. The beginning and ending dates of this schedule is referred to as your pay period, which represents the period in which your staff logged work time or earned wages. Pay periods typically include weekly, biweekly, semi-monthly and monthly. The “payday” is the actual date on which employees are paid. It’s usually a fixed number of days after the end of the pay period.

Withholding payroll taxes.

When it comes to payroll taxes, there are two parties, who are required to pay taxes on wages. This would be the employee and employer. These taxes are usually owed to both the federal government and the state, and in some cases to cities and municipalities as well. This post discusses in detail what some of those taxes are and your responsibilities. However, an employer is generally responsible for collecting federal income tax, Social Security, and Medicare tax from employees’ paychecks based on what employees marked in their Form W-4. The employer must then also pay a matching amount of Social Security and Medicare tax as well as Federal Unemployment Tax (FUTA).

Remitting taxes collected and filing the appropriate tax returns.

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?  This post will give you all the pertinent details.

Now for filings. Paying the taxes is one thing, but you must also file the corresponding returns. If you don’t, then the taxing authorities can’t properly match the deposits with other needed information. Federal Form 941 (quarterly federal tax return) must be filed each quarter, and Form 940 (FUTA tax return) must be filed yearly. You may also have to file similar forms for your state. Employers are also required to send Forms W-2 and W-3 to the Social Security Administration (SSA) each year. Most payroll services will handle these filings for you. If you do them yourself, read more about these forms here.

Keep good records.

As an employer, you must keep track of hours worked for hourly, nonexempt employees. Most workers are classified as either exempt or nonexempt depending on their salary and the type of work they do. You can read about these and other classifications in the FLSA and your state’s wage and hour laws. You can learn more about the timekeeping requirements by reviewing this fact sheet from the Department of Labor .

What To Do If You Have Unfiled Tax Returns

Did you know that per statistics in the 2017 IRS Data Book, there were about 14 million delinquent taxpayers at the end of 2016 and 2017? That means that the IRS has identified 14 million people who should have filed tax returns but did not. With that said, falling behind on filing your taxes is something that happens to many people.

We know that this can be scary, and can cause one to have many questions about how to make it right with the IRS.  Luckily, there are steps that you can take to satisfy what the IRS will require of you and get you back into the system so you can get rid of the worry! So, here are 10 things you should know about the situation:

File even if you don’t think you owe. If you were employed with wages and had taxes withheld from your paycheck, it is possible that you may not owe the IRS at all.  This will depend on the amount withheld from your wages and any other deductions you may have (mortgage interest, etc.). If you have refunds, you should actually receive those for the last three years’ returns UNLESS you have amounts owed for other years. In that scenario, the refunds will be applied to any balances due for the other years.

File original returns to replace IRS created returns.  Sometimes, when you don’t file a return, the IRS files one for you.  In IRS terminology, this is called a Substitute for Return (SFR).  Our experience has been that a SFR is the worst tax return ever! It reports the income that shows up on W2s and 1099s but doesn’t give you any deductions or exemptions.  You may already have a bill from the IRS that was created in connection with a SFR.  The good news is that you can correct these returns, and possibly lower the associated tax and penalties, by filing an “original” return.

Gather your records.  When you have old tax returns to file, it is important for them to be as accurate as possible. So the first things you want to do is pull together your records for the years where you did not file.  This may include 1099s or W2’s you received for work your performed, mortgage interest you paid, or interest, dividends and stock sales.  Don’t worry if you are missing records because if you are:

Secure your IRS transcripts. Your records are supplemented by securing the IRS transcripts that will show what has been reported to the IRS. Basically, you want to make sure you report everything the IRS has for your SSN, otherwise, they will send you some notices claiming that you under reported income. Getting the transcripts will cross-check your records, filling in anything that is missing. The appropriate transcript to request is called the Wage and Income Transcript. You can get it via this page on the IRS website and you can request it online or you can use Form 4506-T to request it via mail.

Review the past six years of activity.    If you have six or more years of unfiled returns, make sure you do the above two steps for each year. Why? In most cases, the IRS requires the last six years’ tax returns to be filed as an indicator of being current and compliant.  This is per Policy Statement 5-133 and Internal Revenue Manual 4.12.1.3.  As such, make this your starting point of your analysis.

Review other sources of income. The IRS transcripts are a checking point, but you will also need to check for things that aren’t reported on them. For example, if there is income you earned that is not on the transcripts (e.g. cash payments), you need to make sure you calculate it and include it on your return.

Review your business income and expenses if you’re self employed.  Income can be recalculated using several methods, including 1099 reporting to the IRS or your bank deposits.  Working with this number, determining what you spent to generate that income. When done, take a look at what is left (i.e. the profit). You can then compare that number to what you spent for that year to live (e.g. rent, mortgage, utilities, etc.) to make sure it appears reasonable/logical. Too often, we see tax returns where there is no business profit, which then begs us to ask “so just how did you live that year?” Rest assured, if we can ask that question, the IRS WILL also be thinking of it too!

Perform a financial review if you think you may owe.  Unfiled returns are really a two-step process:

  1. Getting the returns prepared and filed and,
  2. Negotiating solutions for any balances due with the IRS collections division.  

To perform the second step, one has to prepare a financial analysis of their situation and present it to the IRS. This involves a review of your current income, living expenses, property and debts. It is often the case that the amount owed on unfiled returns cannot be repaid. So performing this analysis will help you determine if your “resolution” will ultimately be to enter into a payment plan, request an offer in compromise, or have your account be put in an uncollectible status.

Consider filing the returns separately if you’re married. If you’re married, but only one spouse was responsible for creating IRS debt, strong consideration should be given to filing a separate return. Filing separately can limit who the IRS can collect from – protecting the non-liable spouse.

File your returns in person if possible. If possible, the unfiled returns should be hand-filed at an IRS Taxpayer Assistance Center. Note that the centers are by appointment only so you will need to schedule it via the previous link. If you bring an extra copy to the center, you can get it stamped by the IRS as proof of filing.  If you are working with an IRS Revenue Officer, the returns should be filed directly with that person.  It can take the IRS several months to process the returns. But if you file them directly with their personnel, it can speed up the processing time, which will then “stop the clock” in terms of certain penalties.

If you owe money, the next step is to enter into one of the 10 resolution options solutions to solve your IRS tax debt as discussed on our sister site.

What Is An IRS Lock In Letter?

Uh oh…a “Love Letter” for the IRS!

The IRS uses information reported on Form W-2 to identify employees with potential withholding compliance problems. What this means is that if a taxpayer chronically claims too many withholding allowances, and generates significant tax balances when they file their return, the IRS may “flag” them. In some cases, if a serious under withholding problem is found to exist for a particular employee, the IRS may issue a lock-in letter to the employer.

How employees get in trouble.  While rare, some employees may actually qualify to be “exempt” from having federal income tax withheld from their checks. Unfortunately, most people who indicate to their employer that they are exempt from withholding, usually do so based upon the poor advice of fellow employees, friends or family members.

Form W-4, Employee’s Withholding Allowance Certificate, is used to indicate to your employer how much federal income tax you would like withheld from your paychecks. The greater the number on the W-4, the smaller the amount of taxes they will withhold. If you claim to be exempt, then no federal income taxes are taken out.

Steps the IRS will take. If the IRS does not think an employee should be exempt (or is withholding too little) they may send them a 2802C Letter. This is basically a “warning” letter to tell you that you need to self-correct the matter before the IRS acts. One way to do this is to use the IRS Withholding Calculator to ensure you are claiming the correct number of allowances.

If you don’t make changes, then the IRS will send you (and your employer) a 2801C Letter. This letter basically states that the IRS has determined that you’re not entitled to claim exempt status. You will be given a telephone number to call the IRS within 60 days for a modification. After that date, your employer must withhold income tax from your wages at a single rate with zero allowances. Once a lock-in rate is effective, an employer can not decrease withholding unless approved by the IRS.

Can a lock in letter decision be reversed? The short answer is yes. Here are the steps that one would take:

  • Call the IRS at 855-839-2235 within 30 days from the date of the letter.
  • When you call, have the following information available:
    • Form W-4 and worksheets. (You must complete the “Two Earners Multiple Jobs Worksheet” on the back of the Form W-4, if you have more than one job or your spouse works.)
    • Most current pay stubs for all jobs.
    • Number of withholding allowances you (and your spouse) are claiming on your Form(s) W-4.
    • The social security number and date of birth for any dependent you are entitled to claim.
    • A copy of the current tax return due, including all schedules, forms, and attachments.

The IRS will then consider your explanation of why you believe you are entitled to a different withholding rate or number of withholding allowances (or exempt status). If they agree with the information provided, then the lock in letter will be reversed.

Are you receiving letters from the IRS? If so, just know that help is available. Feel free to give us a call and we can discuss your situation. Whether it is adjusting your withholding, filing those unfiled tax returns or dealing with an outstanding tax debt, we can help you address the matter and put it behind you!

How Late Can You File A Tax Return?

April 15th is the annual deadline for most people to file their federal income tax return and pay any taxes they owe. But what happens if you can’t file on time? What happens if you file your return after the due date? If you were owed a refund, can you still receive it? This post will answer all of the above questions and then some.

Annual Due Date For Filing Return. Everyone is pretty familiar with the date of April 15th here in the US. This is “Tax Day” or the date that most people are required to file their Form 1040 U.S. Individual Income Tax Return. While this date may move slightly from year to year (due to local holidays) note that it is actually mandated by law. 26 U.S. Code § 6072 actually stipulates the due dates for individual and corporate tax returns.

Can’t File By Due Date? By law, the IRS may assess penalties to taxpayers for both failing to file a tax return and for failing to pay taxes they owe by the deadline. Now, one way to avoid the late filing penalties is to file an extension. Filing Form 4868 Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, will give you an extra 6 months for you to file your return and have it be considered on time. Now, if you owe money, that is still due on April 15th. If you fail to make a payment by then, you will still be subject to the late payment penalties noted above.

Filing After Extension Due Date? If you file after the extended due date, then one of two scenarios occurs:

  • You had a balance due and are now subject to the late filing and late payment penalties
  • You have a refund and are NOT subject to any penalties, but the clock is now ticking for you to claim your refund or lose it.

3 Year Deadline To Claim Refund 26 U.S. Code § 6511 outlines that a taxpayer basically has 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, to claim their refund. So while you won’t pay any penalties for late filing a return in which you were owed a refund, know that you generally only have 3 years to claim it. What happens if you don’t file by then? Well, that refund becomes the property of the US Government and you lose it forever!

What If You Don’t File Voluntarily If you fail to file file a tax return, the IRS may file a substitute return for you. This return might not give you credit for deductions and exemptions you may be entitled to receive. The return the IRS prepares for you will lead to a tax bill, which if unpaid, will trigger the collection process. This can include such actions as a levy on your wages or bank account or the filing of a notice of federal tax lien.

Need Help Filing Your Past Due Return? For filing help, you can call the IRS at 1-800-829-1040 They can help you obtain wage and income information to help prepare a past due return. If you don’t want to speak to anyone at the IRS, you can obtain your transcripts electronically by using the IRS’ Get Transcript tool to request a return or account transcript. You can also get tax forms and instructions to file your past due return by calling 1-800-Tax-Form (1-800-829-3676).

Now, if you would rather avoid all of the above and have a service file your tax returns for you, we’d be more than happy to help. Just go to this page to get started and you can be filed in as little as 24 hours!

Why Is Your Tax Refund Being Offset?

Instead of receiving that nice tax refund check (or direct deposit) you’ve been expecting, you get a notice in the mail.  It tells you that your tax refund has been offset.  What exactly does this mean?

Well, a refund offset means the government has determined that you owe a debt and has applied your tax refund towards that debt.  Now, tax refunds can be offset for many types of debts through the Treasury Offset Program (TOP).  This post will address some of the questions that one commonly has after an offset occurs.

When is a debt sent to the Treasury Offset Program?

In most cases, your name can be sent to TOP if your debt is more than 90 days delinquent. The government agency must then determine that your debt is valid and legally enforceable. The agency will then send you notices about your debt and provide you with opportunities to resolve or dispute your debt. They must also respond to questions and inquiries regarding your debt. If you have not received a notice about your debt, the first step you should take would be to call the agency to which you owe the debt and talk to them.

How do I determine if I have an offset or who I may owe?

To determine if your Federal tax refund has been, or will be offset, it is best to contact the TOP. They can be reached at 800-304-3107.

What types of debt does an offset cover?

Even if you don’t owe the IRS money, your federal tax refund can still be offset through the TOP. Your refund may be seized to pay the following types of debts:

  • State income tax debt
  • Federal non-tax debt (such as delinquent federal student loans)
  • Past-due child support
  • Certain unemployment compensation debts.  You should receive a notice that tells you which agency is getting the money from your tax refund check.  If you don’t agree with the refund offset or want to work out a payment arrangement, you’ll have to contact the agency listed on the notice.  The IRS won’t be able to help you if your debt is not federal tax debt.

How does an offset for a Federal tax debt work?

If you owe the IRS money, say for a previously unpaid balance on an older year, then know that they they will seize your tax refund check. There’s no way around this. Even while you are making payments as part of an installment agreement, the IRS may continue to seize your tax refunds and apply them towards your outstanding balance.

The IRS has the right, and the ability, to offset all future tax refunds until 1) the balance is paid in full or 2) the tax debt is no longer enforceable. You can read this post from our sister site on just how long the IRS has to collect on unpaid tax debt.

What if the refund offset was for my spouse’s debt?

If you file a joint tax return, your full refund can be seized when your spouse owes any of the debts listed above. However, you generally aren’t legally responsible for debts your spouse incurred prior to your marriage, so it is possible to request relief from part of the refund offset.

In order to do this, you can claim an injured spouse allocation to get the portion of the refund you are entitled to receive. You can either file an injured spouse allocation along with your tax return or after you receive notice that your refund has been offset.

Also note that in the future, you can simply file your return as Married Filing Separately. This will keep your refund separate from that of your spouse, and it will not be used to pay for any of their outstanding debt.

Payroll Taxes and Employer Responsibilities

As an employer, understanding the obligations associated with running payroll can be a little daunting.  In this post we will explain what taxes you are responsible for, the returns that need to be filed as well as the associated deadlines.

What are taxes am I responsible for?  An employer’s federal payroll tax responsibilities include withholding income taxes from an employee’s compensation and paying their Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA).  FICA is comprised of the following taxes:

  1. 6.2 percent Social Security tax;
  2. 1.45 percent Medicare tax (the “regular” Medicare tax); and
  3. Since 2013, a 0.9 percent Medicare surtax when the employee earns over $200,000.

You must withhold these amounts from an employee’s wages.  The law also requires you to pay the employer’s portion of two of these taxes:

  1. 6.2 percent Social Security tax
  2. 1.45 percent Medicare tax (the “regular” Medicare tax).

What other things am I responsible for?  The following checklist list provides a brief summary of your basic responsibilities.  Because the individual circumstances for each employer can vary greatly, responsibilities for withholding, depositing, and reporting employment taxes can differ.

New Employees:

  • Verify work eligibility of new employees
  • Record employees’ names and SSNs from social security cards
  • Ask employees for Form W-4

Each Payday:

  • Withhold federal income tax based on each employee’s Form W-4
  • Withhold employee’s share of social security and Medicare taxes
  • Deposit:
    • Withheld income tax
    • Withheld and employer social security taxes
    • Withheld and employer Medicare taxes

Note: Due date of deposit generally depends on your deposit schedule (monthly or  semiweekly).  For more information on deposit schedules, see the following blog post.

Quarterly (By April 30, July 31, October 31, File Form 940 and January 31):

  • Deposit FUTA tax if undeposited amount is over $500
  • File Form 941 (pay tax with return if not required to deposit)

Annually (see below for due dates):

  • File Form 940
  • File Form 944 if required (pay tax with return if not required to deposit)
  • Reconcile Forms 941 (or Form 944) with Forms W-2 and W-3
  • Furnish each employee a Form W-2
  • File Copy A of Forms W-2 and the transmittal Form W-3 with the SSA
  • Furnish each other payee a Form 1099 (for example, Form 1099-MISC)
  • File Forms 1099 and the transmittal Form 1096
  • File Form 945 for any nonpayroll income tax withholding
  • Remind employees to submit a new Form W-4 if they need to change their withholding
  • Ask for a new Form W-4 from employees claiming exemption from income tax withholding

What are the due dates?  The following calendar will tell you what items are due to be filed and their associated deadlines.

By January 31
File Form 941 or Form 944. File Form 941 for the fourth quarter of the previous calendar year and deposit any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 941 if your total tax liability for the quarter is less than $2,500. File Form 944 for the previous calendar year instead of Form 941 if the IRS has notified you in writing to file Form 944 and pay any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 944 if your total tax liability for the year is less than $2,500.

File Form 940. File Form 940 to report any FUTA tax.

Furnish Forms 1099 and W-2. Furnish each employee a completed Form W-2.  Furnish Form 1099-MISC to payees for nonemployee compensation.

File Form W-2. File with the SSA Copy A of all paper and electronic Forms W-2 with Form W-3, Transmittal of Wage and Tax Statements. For more information on reporting Form W-2 information to the SSA electronically, visit the SSA’s Employer W-2 Filing Instructions & Information webpage. If filing electronically, via the SSA’s Form W-2 Online service, the SSA will generate Form W-3 data from the electronic submission of Form(s) W-2.

File Form 1099-MISC reporting nonemployee compensation. File with the IRS Copy A of all paper and electronic Forms 1099-MISC that report nonemployee compensation, with Form 1096, Annual Summary and Transmittal of U.S. Information Returns.

File Form 945. File Form 945 to report any nonpayroll federal income tax withheld.

By February 28
Request a new Form W-4 from exempt employees. Ask for a new Form W-4 from each employee who claimed exemption from income tax withholding last year.

File paper Forms 1099 and 1096. File Copy A of all paper Forms 1099, except Forms 1099-MISC reporting nonemployee compensation, with Form 1096 with the IRS.

File paper Form 8027. File paper Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, with the IRS.

On March 1
Forms W-4 claiming exemption from withholding expire. Any Form W-4 claiming exemption from withholding for the previous year has now expired. Begin withholding for any employee who previously claimed exemption from withholding but hasn’t given you a new Form W-4 for the current year. If the employee doesn’t give you a new Form W-4, withhold tax based on the last valid Form W-4 you have for the employee that doesn’t claim exemption from withholding or, if one doesn’t exist, as if he or she is single with zero withholding allowances. If the employee gives you a new Form W-4 claiming exemption from withholding after February 28, you may apply the exemption to future wages, but don’t refund taxes withheld while the exempt status wasn’t in place.

By March 31
File electronic Forms 1099 and 8027. File electronic Forms 1099, except Forms 1099-MISC reporting nonemployee compensation, and 8027 with the IRS.

By April 30, July 31, October 31, and January 31
Deposit FUTA taxes. Deposit FUTA tax for the quarter (including any amount carried over from other quarters) if over $500. If $500 or less, carry it over to the next quarter.

File Form 941. File Form 941 and deposit any undeposited income, social security, and Medicare taxes. You may pay these taxes with Form 941 if your total tax liability for the quarter is less than $2,500. Don’t file Form 941 for these quarters if you have been notified to file Form 944 and you didn’t request and receive written notice from the IRS to file quarterly Forms 941.

Before December 1
New Forms W-4. Remind employees to submit a new Form W-4 if their marital status or withholding allowances have changed or will change for the next year.

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.

IRS Using Private Debt Collection Agencies

Private Debt Collection
In December 2015, Congress passed the Fixing America’s Surface Transportation Act (FAST Act). Section 32102 of the act requires the IRS to use private collection agencies (PCAs) for the collection of outstanding “inactive” tax receivables.  This post will talk about how the program works as well as answer some of the “concerns” people have voiced to us.

How the new program works
Typically, the accounts that are assigned to private collection are those where the unpaid tax obligations are not currently being worked by IRS collection employees and often were assessed by the tax agency several years ago. Taxpayers being assigned to a private firm would have had multiple contacts from the IRS in previous years and still have an unpaid tax bill.

First, the IRS will send you a Notice CP40 with  the name of the PCA, the PCA’s toll-free telephone number, and a ten-digit Taxpayer Authentication Number (TAN).   This mailing will include a copy of Publication 4518, What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency.

Only four private groups are participating in the program:

CBE Group
1309 Technology Pkwy
Cedar Falls, IA 50613

Conserve
200 CrossKeys Office park
Fairport, NY 14450

Performant
333 N Canyons Pkwy
Livermore, CA 94551

Pioneer
325 Daniel Zenker Dr
Horseheads, NY 14845

The taxpayer’s account will only be assigned to one of these agencies, never to all four.  Furthermore, no other private groups are being used or authorized to represent the IRS in these collection efforts.

Once the IRS letter is sent, the PCAs will send their own letter to the taxpayer and their representative confirming the account transfer. To protect the taxpayer’s privacy and security, both the IRS letter and the collection firm’s letter will contain information that will help taxpayers identify the tax amount owed and assure taxpayers that future collection agency calls they may receive are legitimate.

How do I know if the company contacting me is a scam?
Before the PCA contacts you, they will send you a letter explaining that your tax debt has been assigned to it and listing the same TAN discussed above.  At the beginning of every phone contact, the PCA must ask you to provide the first five digits of the TAN and must respond by reading you the last five digits of the TAN. This allows the PCA to verify your identify and allows you to verify that that the caller works for the PCA. The PCA cannot continue the conversation with you until your identity has been verified.

“Here’s a simple rule to keep in mind. You won’t get a call from a private collection firm unless you have unpaid tax debts going back several years and you’ve already heard from the IRS multiple times,” said IRS Commissioner John Koskinen. “The people included in the private collection program typically already know they have a tax issue. If you get a call from someone saying they’re from one of these groups and you’ve paid your taxes, that’s a sure sign of a scam.”

If taxpayers are unsure if they have an unpaid tax debt from a previous year – which is what the private collection firms will handle – they can go to IRS.gov and check their account balance via the View Your Tax Account service.  If the account balance says zero, that means nothing is due, and you typically wouldn’t be getting a contact from the IRS or the private firm.

Whether or not a taxpayer’s account is assigned to a private collection agency, the IRS warns taxpayers to beware of scammers pretending to be from the IRS or an IRS contractor. Here are some things the scammers often do but the IRS and its contractors will never do.

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes, and if a case is assigned to a PCA, both the IRS and the authorized collection agency will send the taxpayer a letter. Payment will always be to the United States Treasury.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.

“Unexpected and threatening calls out of the blue from someone saying they’re representing the IRS to collect a tax debt is a warning sign people should watch out for,” Koskinen said.

What if I can’t find my Taxpayer Authentication Number?
You can request that the PCA re-send the letter with the TAN. Alternatively, if you agree, the PCA may verify your identity by using your Social Security Number instead of the TAN, as long as you first provide your full name, address, and date of birth. However, the use of your Social Security Number instead of the TAN does not allow you to verify that the caller works for the PCA, so you should consider carefully before agreeing to this.

What can (and can’t) a private collection agency do?
The private firms are authorized to discuss payment options, including setting up payment agreements with taxpayers.  A PCA may not take collection action (such as file a lien, levy your bank account, or garnish your wages), nor may it issue a summons or report your IRS tax debt to the credit rating agencies.  But as with cases assigned to IRS employees, any tax payment must be made, either electronically or by check, to the IRS. A payment should never be sent to the private firm or anyone besides the IRS or the U.S. Treasury. Checks should only be made payable to the United States Treasury. To find out more about available payment options, www.IRS.gov/Payments.

What if I want to explore other alternatives with the IRS?
You can call the IRS and explain that you do not want to pay in installments, or can’t afford to do so. If you orally advise the PCA you plan to contact IRS about collection alternatives, the PCA will place a 60-day hold on your account. If you have not reached an agreement with IRS within those 60 days, the PCA may resume collection activity on your account. Because many actions take longer than 60 days, you may wish to write to the PCA to request that it stop contacting you by sending them a No Contact Letter.

Do I have to work with the private collection agency?
No. You can send the PCA a written request to stop further communication with you (see No Contact Letter above).

What if I need to make a complaint about a PCA?
To make a complaint about a PCA or report misconduct by its employee, call the TIGTA hotline at 800-366-4484 or visit www.tigta.gov or write to:

Treasury Inspector General for Tax Administration
Post Office Box 589
Ben Franklin Station
Washington, DC 20044-0589