Paying Federal State Income Taxes on Meals by sgt19112

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									                                                                                                      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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