Category: Taxpayer Representation

One of the most common points of confusion among business owners in regard to their tax debt has to do with the Trust Fund Recovery Penalty. I’d like to explain what “trust fund” taxes are, where they come from, how the IRS holds somebody personally responsible for them, and, most importantly, what you can do about them.

What Are “Trust Fund” Taxes?

“Trust fund” taxes are any tax that is collected by you, on behalf of somebody else. There are many different trust fund taxes, but the two most common are sales taxes and income withholding taxes.

Most states are very aggressive about collecting sales taxes (North Carolina will physically arrest you for not paying them). Technically speaking, sales taxes are owed by the person making the purchase. However, because they are collected at the point of sale, they are a trust fund tax. This is because the person paying them (e.g., your customer) is “trusting” you to hold that tax money and pay it on their behalf. When you receive sales tax money from your customers, you are supposed to hold it in a separate “trust” account, and then hand it over to the tax man when it is due (usually monthly, in most states/counties).

Income withholding taxes are also “entrusted” to you by your employees. Specifically, these are income taxes you withhold from paychecks, and the employee’s half of Social Security and Medicare that you take out of their paycheck.

Even though the employee never sees the money that’s taken out of their paycheck, they expect it to exist, somewhere. That somewhere is a trust account (generally your payroll account) where you save that money up and then pay it to the government every two weeks or monthly.

Payroll taxes are the one of the biggest enforcement concern to the IRS. Part of running a business and having employees is exercising ordinary business care and prudence. This is fancy lingo enshrined within the tax code that basically means the IRS expects you to exercise common sense in regards to running your business. Part of this common sense is to understand that your employees cost you more than just the paycheck you actually write them, and if your business doesn’t have the revenue to support those extra costs of having employees, then you shouldn’t have the employee.

So, to recap, trust fund taxes are taxes that are owed by other people, such as … Continue reading

TaxMasters, a tax resolution firm based out of Houston, TX, had been under investigation by the Texas Attorney General since 2010 for unethical sales practices. After finally going to trial earlier this year, a jury has passed down a verdict of $195 million against the firm. This amount includes $113 million in restitution to the firm’s customers, $81 million in civil penalties, and $1 million in attorney fees. The company was found guilty of 110,000 violations of Texas consumer protection laws.

Founder and CEO Patrick Cox himself must pay well over $40 million of the award from his own personal fortune.

The firm was primarily accused of failing to disclose it’s no-refund policy, and for failing to immediately start work on a client’s case, but rather waiting until fees were fully paid before even doing anything to protect clients.

The firm recently filed for Chapter 11 bankruptcy protection during the course of the trial.

If you were a TaxMasters client, however, don’t expect to get any money. In it’s bankruptcy filing, the company only listed $50,000 in assets, and it is unlikely that Patrick Cox possesses the $40 million assessed against himself.

So, what can you do if you are a victim of TaxMasters, or any other company? Here are some quick tips:

1. Contact your Revenue Officer immediately, to find out the status of your case in the collections process.
2. If you have tax returns that are overdue, get them filed immediately.
3. Assemble any financial information requested by your Revenue Officer.
4. Request a 120 day collections hold in order to give you time to put everything together and prepare a plan of attack, particularly if you can’t pay your tax debt in full.
5. If your tax situation is more complex than you are comfortable handling, then seek professional assistance from a licensed taxpayer representative (Enrolled Agent, CPA, or tax attorney).

It’s a travesty that unscrupulous companies such as TaxMasters, American Tax Relief (shut down by the FTC with a $105 million judgement), Roni Deutsch (shut down by the California AG), and JK Harris (went bankrupt in 2011) have been stealing from hardworking taxpayers for years (TaxMasters complaints ran back to 2005). Always conduct proper due diligence before hiring any tax resolution firm.

Even if you already have representation, if you want a second opinion about your case, be sure to contact a local tax firm in our directory.… Continue reading

Note: This is a guest post written by an attorney that formerly worked in the tax resolution industry, and later went on to work with the US Attorney’s Office. He has asked to remain anonymous, but wanted to share some personal insights about the IRS Collections process.
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For those that don’t work much with the Collections Division of the Internal Revenue Service, there is a stigma attached to both the methods and people involved. On one side, the IRS is seen as bullying taxpayers, especially the “little old ladies” and the “working men.” On the other side, the taxpayers are seen as being inadequate business people and as “stealing” from the government. Is the IRS an evil organization created by bureaucrats to systematically take the wealth of it’s citizens? Are the individuals caught up in the system evildoers needing to brought to justice? Both statements are a little extreme.

In all reality, the Collections Division of the IRS does not care where the money goes. Sometimes, it does not even care if it gets it. It, like many administrative agencies, seems more caught up it’s own procedures. Anyone having worked with the IRS might wonder if they are on a fool’s errand, considering how many of the installment agreements entered into by the IRS default.

The Collections Division is concerned primarily about getting taxes that should have been paid, but were not (a.k.a. “the tax gap”). These can be personal income taxes, employment taxes, trust fund recovery penalties, corporate income taxes, etc… The majority of this collections is done in a civil (i.e. non-criminal) setting. Within this context, there are common dilemmas that rear their heads every day, especially with regards to employment (withholding and FICA) taxes.

Although there are many reasons for a business to fall behind on its employment taxes, a common scenario is as follows: Small business owner falls on hard times; bills must be paid, but there is not enough to go around. The IRS relies exclusively on voluntary compliance (at least at the outset), as do most creditors. However, the IRS probably has more debtors than any other creditor in the country. As such, they cannot detect and move fast enough to put the strong arm down on the taxpayers. Because there is only so much to go around for the taxpayer, they pay the bills that need immediate attention (i.e. payroll, rent, utilities) and the employment taxes go … Continue reading