tax trouble, need help
July 1, 2010 5:11 AM Subscribe
Through a combination of bad advice and sloppiness / ineptitude, we've gotten ourselves into a fix with the IRS. No saber rattling yet but I know it's coming, so I'm hoping for some words of experience.
Background: Small sub-S corporation in its third year. One employee, also the owner.
First year employee Federal withholding was made accurately; social security / Medicare were probably underpaid (still working on that), plus the CPA handling this at the time did not make monthly 941 deposits. (Why I don't know.) Not all quarterly 941 returns were filed (again still working on that). 1120 return was created but IRS says was not filed.
Second year: CPA no longer involved (not replaced - bad move; thought we could handle internally, and demonstrated as it turned out that we could not). Monthly withholding / SS / medicare tax deposits made. However, due to fundamental flaw in calculations, these were also underpaid. Two out of the four 941 returns not filed. 1120S was filed on time.
IRS has sent notification about the missing 941 and 1120 returns. Had a conversation with a local IRS case manager who has given us a month to file the missing returns. That may raise enough red flags to trigger an audit, when it will become obvious (by comparing payments to employee with withholding payments made) that the employee withholdings were underpaid.
I know we're in for back taxes, penalties, and interest. Beyond that, how can I expect the IRS to proceed? What's their typical game plan? I've recruited a new CPA to go over all the returns and filings, etc., to figure out where and by how much we're short ... and I plan to talk to a tax attorney also (putting out feelers now). But I'm anxious as you might expect to get a glimmer as to how the IRS is going to handle this situation. Thanks for any and all informed feedback. (BTW I know we screwed up, big time. Fully conscious and aware, and fully intent on making things right. Thanks again.)
Background: Small sub-S corporation in its third year. One employee, also the owner.
First year employee Federal withholding was made accurately; social security / Medicare were probably underpaid (still working on that), plus the CPA handling this at the time did not make monthly 941 deposits. (Why I don't know.) Not all quarterly 941 returns were filed (again still working on that). 1120 return was created but IRS says was not filed.
Second year: CPA no longer involved (not replaced - bad move; thought we could handle internally, and demonstrated as it turned out that we could not). Monthly withholding / SS / medicare tax deposits made. However, due to fundamental flaw in calculations, these were also underpaid. Two out of the four 941 returns not filed. 1120S was filed on time.
IRS has sent notification about the missing 941 and 1120 returns. Had a conversation with a local IRS case manager who has given us a month to file the missing returns. That may raise enough red flags to trigger an audit, when it will become obvious (by comparing payments to employee with withholding payments made) that the employee withholdings were underpaid.
I know we're in for back taxes, penalties, and interest. Beyond that, how can I expect the IRS to proceed? What's their typical game plan? I've recruited a new CPA to go over all the returns and filings, etc., to figure out where and by how much we're short ... and I plan to talk to a tax attorney also (putting out feelers now). But I'm anxious as you might expect to get a glimmer as to how the IRS is going to handle this situation. Thanks for any and all informed feedback. (BTW I know we screwed up, big time. Fully conscious and aware, and fully intent on making things right. Thanks again.)
The IRS, while insistent, is generally pretty courteous and professional. They totally understand that the tax code is complicated and that most people don't understand it. As you've discovered, even CPAs can get it wrong. They even sometimes waive penalties if they get the feeling that you really did try to comply.
So while they definitely want their money, I wouldn't expect them to be unpleasant about it. This is going to cost you money, but it shouldn't cost you sleep.
posted by valkyryn at 6:46 AM on July 1, 2010
So while they definitely want their money, I wouldn't expect them to be unpleasant about it. This is going to cost you money, but it shouldn't cost you sleep.
posted by valkyryn at 6:46 AM on July 1, 2010
Generally, if you are willing to pay what you owe, the IRS will work with you.
posted by Flood at 7:17 AM on July 1, 2010
posted by Flood at 7:17 AM on July 1, 2010
My husband's undergoing a tax fiasco that's fundamentally very different from yours--an error on his part triggered an audit, and they insistently claimed he owes money that they eventually admitted he does not (but they're still trying to get him for penalties?)--but our experiences with the IRS have been very, very different from what's been reported here, where they were generally threatening and unhelpful at every step of the way and haven't even always followed their own procedures (ie, levying bank accounts without sending a certified letter first). One thing we've learned is that it's far better to communicate via post than phone; the impression we've gotten is that no records of phone calls are kept by their employees and you can't expect consistency between phone representatives.
So I don't mean to be scary, and I hope your experience is different from ours, but I can't help but balk at the "courteous and professional" shiz.
Anyway, in the event that your experiences start to get unpleasant, I'd highly recommend contacting the Taxpayer Advocate and seeing if they can help your case.
posted by PhoBWanKenobi at 4:01 PM on July 1, 2010
So I don't mean to be scary, and I hope your experience is different from ours, but I can't help but balk at the "courteous and professional" shiz.
Anyway, in the event that your experiences start to get unpleasant, I'd highly recommend contacting the Taxpayer Advocate and seeing if they can help your case.
posted by PhoBWanKenobi at 4:01 PM on July 1, 2010
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Good news is that yours is a fairly common situation. Business taxes are complex, and businesses make mistakes like this every day. While everyone loves to hate the IRS, anecdotally they are not that bad to work with, nor are they going to treat you like a criminal provided you work with them to provide accurate returns for all periods requested and come clean on any resultant problems, no matter how expensive. Get a CPA involved, for sure, because you're already in the soup and you don't want to compound matters by trying a DIY approach. He/she should be able to advise you about what to revisit and what not based on the code, not on wishful thinking.
Not sure where else to make this point, but if possible, you might consider a CPA who is a tax attorney as well, or who works in close partnership with one. It's a common arrangement, for just this reason.
Bad news, as you're already aware, is that there will be a price tag at the end of the movie. Don't expect the IRS to settle for pennies on the dollar and cut deals left and right; they're the government, not CitiBank. Those commercials you see with those sharp tax attornies? Rather overblown. However, competent councel and advocacy on your behalf may minimize some of the penalties. Don't expect them to budge on tax and interest.
If it's more than you can pay at once, they will work out payment plans, but treat that as your number-one debt priority. Again, they ain't CitiBank, and "being late on a payment or two" isn't going to be a good game plan.
posted by randomkeystrike at 6:44 AM on July 1, 2010