Understanding the IRS Trust Fund Recovery Penalty

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

Final Thoughts For 2011 Tax Returns on Deadline Day

Today is April 17th: Tax day. I’m sure that it will be discussed during the day’s talk shows and news broadcasts, and there will be long lines at the post offices that stay open until midnight. There will be reminders aplenty around you today that this is the day, the final day, the deadline, the “do it or go to jail” day.

In reality, that’s all hogwash.

In all actuality, there is only one firm, hard deadline today for most taxpayers: Today is the last day the IRS will accept e-files. If you file tomorrow, you have to mail it in.

What about an extension? Yes, if you want to file an extension, it’s a good idea to do so. But NOT filing an extension doesn’t have any real consequences.

If you owe the IRS money for 2011, then yes, today is theoretically the deadline to pay it. But for most people reading this particular article, the reason they’re reading this info in the first place is because they don’t have the cash on hand to pay their tax bills. So what really happens if you don’t file and pay on time?

Really, nothing of non-monetary consequence.

Yes, you’re going to pay some interest and penalties if you owe. There are both late filing penalties AND failure to pay penalties, and yes, they’re steep. These penalties are a percentage of what you owe, as are interest charges. Interest is compounded daily, which starts to add up.

If you’re able to pay your taxes with cash, a credit card, or borrowing the money from relatives, then do so, and do it on time. Even if you owe several thousand dollars and have room on a credit card to pay it, then do so, and do it on time — the finance charges on the card are going to be a lot lower than what the IRS will charge you over the course of 6 months to a year.

If you owe the IRS so much money that you simply can’t pay it no matter what, then don’t fret too much. If this is the first time you’ve accrued a tax liability, then the IRS has special rules that allow for the forgiveness of penalties for first time offenders.

If you have previous tax liabilities, then this will get added on to your total. As your total grows, so does your eligibility for certain tax resolution … Continue reading

Jury Awards TaxMasters Victims $113 Million

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