BOSTON ® Covering Massachusetts, New Hampshire and Rhode Island February 2008 THE PROFESSIONAL AND BUSINESS WOMAN’S JOURNAL F EATURE Ignore Trust Fund Taxes, Get IRS/DOR Attention By Laura Brown stickie and put it on your computer monitor, and you may even tell Y our focus at this time of your bookkeeper, so you know year naturally turns to that’s the plan and it’s going to hap- income tax returns, but as pen. Well, the big check comes, and a business owner, you should be again, something urgent is paid paying attention to “trust fund” instead. taxes year-round – unless you want It has been my experience that the the Internal Revenue Service (IRS) IRS/DOR become very aggressive and the Massachusetts Department very fast and will come knocking of Revenue (DOR) to be your worst within several months for their trust nightmare and cause you many fund taxes, as opposed to a year or sleepless nights. so for income taxes. My clients con- What are trust fund taxes? Trust stantly ask, “I’m doing the best I fund taxes include the federal and can, why can’t they wait a little for state withholding amounts taken their money, and why are they so from your employees’ paychecks. mean?” They also include the state sales and Laura Brown Well, because the IRS/DOR view meals taxes added to customers’ The employees want their paycheck the trust fund taxes as their money, invoices. or they will quit; suppliers and ven- which you have embezzled. In my These taxes are referred to as dors need to get paid now or else opinion, trust fund taxes are the trust fund taxes because the busi- they won’t ship; the bank and leas- worst taxes to pay in a tardy fash- ness is supposed to hold the funds ing companies must get their ion. Of course, you should not miss “in trust” for prompt turnover to monthly payment or they will close any taxes that you owe. But the con- the IRS/DOR along with a tax your line of credit or repossess your sequences for not paying the “trust return illustrating how the amount equipment. fund” tax are very serious. was calculated. You continually prioritize the What you need to know: The fact Prompt payment can be weekly monthly payments, and guess what that your business is incorporated or monthly. In other words, the IRS – it seems that the only ones that are or that your company and/or you and DOR are trusting you to take not hassling you are the DOR and file for bankruptcy does not matter, money from someone and turn it the IRS! So you pay the employees, as trust fund taxes are nondis- over to the government quickly. the suppliers and the bank to keep chargeable in bankruptcy. Here’s how things can go wrong. your business going, and when that If not paid by the business, the In the real world, you experience “big check” comes in from your trust fund taxes become the person- cash flow problems and economic tardy customer, you’ll take the al liability of the person (or persons) downturns. Nevertheless, payroll whole thing to pay the IRS and who the IRS/DOR determine has liabilities can remain constant and DOR. the status, duty and control over the your regular customers pay within You make a note of it in your finances, known as the “Responsible 90 or 120 days, instead of 30 or 60. schedule, even write it down on a Party.” BOSTON ® Covering Massachusetts, New Hampshire and Rhode Island February 2008 THE PROFESSIONAL AND BUSINESS WOMAN’S JOURNAL F EATURE And then the fun begins – in trust IRS/DOR took “his” refund that his of information and documents, fund tax land, there is no “innocent tax situation generated. including a list of your accounts until proven guilty” because YOU While you are at it, you can receivable. Those people may be have the burden of proving that explain why there is a federal tax contacted. I personally have you are NOT the Responsible Party. lien filed against your (jointly held) received a notice from the IRS In addition, the more individuals home at the public registry of ordering me to pay them instead of designated as the Responsible deeds, which lien was also pub- my subcontractor who neglected to Party, the better for the IRS/DOR lished in last week’s Banker and pay his trust fund tax. because they can go after the per- Tradesmen. How mortifying! Many clients have come to me son with the deepest pockets. You And what about when your hus- after they have tried unsuccessfully will see what I mean as I tell you band asks, “Honey, did you know to negotiate with the very aggres- more. that the bank froze our home equity sive folks at the IRS/DOR. The key Together, the individuals are loan so we can’t pay the contractor is to get the situation under control jointly and severally liable, mean- to finish the kitchen and bath cur- and avoid the personal liability by ing that the IRS/DOR can recover rently under construction? And proving that you are not the the entire amount from one person what is this levy against our check- Responsible Party even though you (which may or may not be you) or a ing account? The mortgage pay- fit the profile. bit from everyone. ment is going to bounce.” This is not easy. The term In your situation, if you and oth- Why isn’t the IRS going after one “Responsible Party” is not a ers own the business, are officers of of the other owners? After all, did- defined term that may be easy to the company and can all write n’t they handle the office while you disprove, but is a factual inquiry checks (or delegate to a bookkeeper were traveling? decided upon a case-by-case basis. and, sometimes, you need more So, what are you to do? This can The moral of my story is a warn- than one signature for a large and has happened to my clients. ing that a wise woman should mon- amount), the IRS/DOR may deter- You are especially vulnerable if you itor her and her company’s tax situ- mine that several people are are busy or lack good financial ation all year long. Responsible Parties, including you. oversight. In these situations, deal- Or the absolute worst can hap- ing with the IRS/DOR can seem Laura Brown is a tax attorney with a pen. At home the party continues as like a full-time job, diverting your master of laws degree (LL.M.) in taxa- you explain to your spouse (if you focus from your business. tion as well as her J.D. She has been file a joint tax return) why the The IRS/DOR will demand a lot practicing out of Rockland since 1995.
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