Can I bargain with the IRS?
November 24, 2005 10:27 PM Subscribe
In 2001, my .com finally imploded in the week after September 11th, when our few remaining clients went out of business. For another couple of years the corporation continued to exist, with me as sole employee, though it was only an after-hours interest -- I've long since moved on from doing anything with this corporation. It's existed only on paper for the past two years while I've paid the IRS, out of my own pocket, some payroll taxes (941 withholdings) that my accounting errors led me to underpay. They (and I) have just noticed that I forgot to file for the Q3 2001. It seems that I paid $6,000 to employees in that final quarter, so I figure my business owes the IRS another couple of thousand dollars in taxes.
Now what? I don't have a couple of thousand dollars to throw at this, and the corporation's bank account is all but empty. Can I bargain with the IRS? Will they give me any bonus points for coming forward and telling them about this? Is my moral obligation to personally pay this debt sufficient that I should just buck up and set up a payment plan? What happens if, worst case, I just shut down the corporation?
Please don't tell me to consult a tax attorney. Yes, that would be the best thing to do, but if I had the money to consult an attorney, I'd have the money to just pay off the IRS and be done with it.
Please don't tell me to consult a tax attorney. Yes, that would be the best thing to do, but if I had the money to consult an attorney, I'd have the money to just pay off the IRS and be done with it.
Yes, as the Admiral says, limited liability should be your friend. Can you just pay the IRS whatever pennies the corporate account has left and then tell them the company no longer exists? I think (corporate) bankruptcy might be the ideal solution here, but that costs money, too. So can any legal types come up with any way to go into de facto bankruptcy?
posted by SuperNova at 10:59 PM on November 24, 2005
posted by SuperNova at 10:59 PM on November 24, 2005
I will assume this is a privately-held corporation.......I have been there and gone through a very similar situation in the past.
- As for the tax burden, YOU don't owe a dime. The corporation does. Many small companies choose to incorporate solely to shield themselves from personal liability.
- Have you filed Articles of Dissolution?
- This would be a big issue if you wanted to preserve your business. Since apparently you don't, the reality is you have little to concern yourself with. You personally have little to worry about. Corporations are dissolved everyday owing money to the federal government.
posted by Independent Scholarship at 11:23 PM on November 24, 2005
- As for the tax burden, YOU don't owe a dime. The corporation does. Many small companies choose to incorporate solely to shield themselves from personal liability.
- Have you filed Articles of Dissolution?
- This would be a big issue if you wanted to preserve your business. Since apparently you don't, the reality is you have little to concern yourself with. You personally have little to worry about. Corporations are dissolved everyday owing money to the federal government.
posted by Independent Scholarship at 11:23 PM on November 24, 2005
Corporations are dissolved everyday owing money to the federal government.
Excuse my curiosity, but wouldn't a federal government make sure that a corporation just can't be used to accumulate debts with government and then just disappear ?
posted by elpapacito at 3:00 AM on November 25, 2005
Excuse my curiosity, but wouldn't a federal government make sure that a corporation just can't be used to accumulate debts with government and then just disappear ?
posted by elpapacito at 3:00 AM on November 25, 2005
Excuse my curiosity, but wouldn't a federal government make sure that a corporation just can't be used to accumulate debts with government and then just disappear?
The issue is whether the owner took excessive amounts OUT of the business, in the form of an excessively high salary, or excessive benefits (for example, free use of a corporate jet for personal trips), or dividend payments in excess of what would be reasonable, or inappropriate related-party transactions (for example, the corporation paid rent on a building that was twice market rate, because the building was owned by the person who also owned the corporation).
If in fact none of these happened - that the corporation truly was run as a separate, independent business, then NO, the government can't go after the owner(s) because the business happened to fail. The reason involves a larger design decision - that individuals would be much more hesitant to start a business if their personal wealth were totally at risk because of ownership. Similarly, stockholders (partial owners) be much more difficult to find - would YOU own stock in Alaska Airlines if you could not only lose what you invested, but the creditors could come after your car and house and bank accounts because you were a shareholder and United Airlines owed them money?
To return to the question at hand: I agree with the others in saying that the poster should contact the IRS; the IRS is likely to be willing to work out a payment plan, and to minimize payments.
Also, for what it's worth, personal payments of taxes owed by the corporation ARE deductible on one's personal income tax form (Schedule C?). I'm not sure if they're considered additional investment (owner's contribution) or an expense in the year that they are made; if the latter, when the corporation is closed, the total investment in it can be written off, and expensed at that point. The IRS does provide tax assistance (via phone), as well as on-line publications, to answer the question of when these payments can be taken as personal deductions.
posted by WestCoaster at 5:35 AM on November 25, 2005
The issue is whether the owner took excessive amounts OUT of the business, in the form of an excessively high salary, or excessive benefits (for example, free use of a corporate jet for personal trips), or dividend payments in excess of what would be reasonable, or inappropriate related-party transactions (for example, the corporation paid rent on a building that was twice market rate, because the building was owned by the person who also owned the corporation).
If in fact none of these happened - that the corporation truly was run as a separate, independent business, then NO, the government can't go after the owner(s) because the business happened to fail. The reason involves a larger design decision - that individuals would be much more hesitant to start a business if their personal wealth were totally at risk because of ownership. Similarly, stockholders (partial owners) be much more difficult to find - would YOU own stock in Alaska Airlines if you could not only lose what you invested, but the creditors could come after your car and house and bank accounts because you were a shareholder and United Airlines owed them money?
To return to the question at hand: I agree with the others in saying that the poster should contact the IRS; the IRS is likely to be willing to work out a payment plan, and to minimize payments.
Also, for what it's worth, personal payments of taxes owed by the corporation ARE deductible on one's personal income tax form (Schedule C?). I'm not sure if they're considered additional investment (owner's contribution) or an expense in the year that they are made; if the latter, when the corporation is closed, the total investment in it can be written off, and expensed at that point. The IRS does provide tax assistance (via phone), as well as on-line publications, to answer the question of when these payments can be taken as personal deductions.
posted by WestCoaster at 5:35 AM on November 25, 2005
Although I'm not a (tax) lawyer, I recognize that there are some significant errors in prior postings. (I will be making a MeTa on this, as well, not meaning to offend anyone above, of course.)
Most importantly, control persons of corporations are usually personally liable for failure to withhold payroll tax (social security and medicare tax) from their wages, regardless of the corporate entity lying between the control person and the employee. Payroll taxes total 15.3% of the total gross wages paid.
Income tax and other withholdings excluding payroll tax, however, have the benefit of corporate limited liability, unless some kind of impropriety can be proven.
I think you do need to bite the bullet and get a tax settlement specialist on your side. In addition to interest, penalties can easily be assessed in circumstances like you're talking about, and a good settlement specialist can help you structure your admissions to minimize penalties. Moreover, while the IRS is quite lenient when it comes honest mistakes, you need to be sure to marshal the evidence properly so that "honest mistake" is what immediately jumps out to an examiner. If issues as to willfully bad or negligent record-keeping are what jumps out, you won't be happy with the result.
posted by MattD at 7:03 AM on November 25, 2005
Most importantly, control persons of corporations are usually personally liable for failure to withhold payroll tax (social security and medicare tax) from their wages, regardless of the corporate entity lying between the control person and the employee. Payroll taxes total 15.3% of the total gross wages paid.
Income tax and other withholdings excluding payroll tax, however, have the benefit of corporate limited liability, unless some kind of impropriety can be proven.
I think you do need to bite the bullet and get a tax settlement specialist on your side. In addition to interest, penalties can easily be assessed in circumstances like you're talking about, and a good settlement specialist can help you structure your admissions to minimize penalties. Moreover, while the IRS is quite lenient when it comes honest mistakes, you need to be sure to marshal the evidence properly so that "honest mistake" is what immediately jumps out to an examiner. If issues as to willfully bad or negligent record-keeping are what jumps out, you won't be happy with the result.
posted by MattD at 7:03 AM on November 25, 2005
Corporations, at least where I live, have officers liable for any and all faults. AFAIK, the following people would be those named as the ones "left holding the bag", so to speak:
- Directors
- President
- Vice President
- Comptroller / Treasurer
- Vice Comptroller / Treasurer
Those persons are the ones who get the squeeze when things really go south (lawsuits, owed monies, etc).Which is why they often pay themselves so highly. (ya, right, in your dreams for the average corp.)
posted by shepd at 7:14 AM on November 25, 2005
- Directors
- President
- Vice President
- Comptroller / Treasurer
- Vice Comptroller / Treasurer
Those persons are the ones who get the squeeze when things really go south (lawsuits, owed monies, etc).
posted by shepd at 7:14 AM on November 25, 2005
I agree with MattD - get an attorney, or at the very least a skilled accountant to look at this. The IRS plays hardball. They may misinterpret the law to you, they may put a lien on your home and your bank account and garnish your wages. Unless some MeFite steps forward and says they have professional knowledge here I would be wary of relying just on the advice here. The stakes are too high.
posted by caddis at 7:19 AM on November 25, 2005
posted by caddis at 7:19 AM on November 25, 2005
Is there a local law school with a legal clinic, where a student might be happy for the opportunity to look into this for you? Usually free or sliding scale.
posted by availablelight at 8:12 AM on November 25, 2005
posted by availablelight at 8:12 AM on November 25, 2005
The IRS does bargain, with everyone. No, you don't have a moral obligation to personally repay debts of the corporation. If they just noticed that you didn't file in 2001, they're at fault as much as you are...
I would call them, talk to someone - perhaps in person - explain the situation entirely, tell them the corporation has X left in the bank and they can have it in exchange for full forgiveness of the debt, and that the corporation will no longer be in operation. I would expect - very strongly - that they will accept it. If they don't, just ignore them. The worst they can do is take the X that the corp. has in the bank...
posted by jellicle at 8:39 AM on November 25, 2005
I would call them, talk to someone - perhaps in person - explain the situation entirely, tell them the corporation has X left in the bank and they can have it in exchange for full forgiveness of the debt, and that the corporation will no longer be in operation. I would expect - very strongly - that they will accept it. If they don't, just ignore them. The worst they can do is take the X that the corp. has in the bank...
posted by jellicle at 8:39 AM on November 25, 2005
You really do want to get a tax specialist on your side. See if you can get something pro-bono or bartered.
I know a lot of lawyers that I've met aren't very tech-savvy, and they do a lot of work on their computers. I have a sort of ad-hoc arrangement with the man my mom married* in that he can call me up whenever for tech support, and if I can help I do. In exchange I can call him up if I ever have legal issues, any time. He's a real estate specialist, so this is really handy when signing rental leases, which I've had him go over for me before, and it's nice to know that qualified eyeballs are looking over those obtusely-worded things. (*Tangent, I feel weird calling this man "step-dad" because "step-dad" seems too lukewarm, and "dad" is maybe a tad too strong. Though if I liked my natural dad any less I'd have no problems calling this man "dad")
Anyway.
Not only does the IRS play hardball, they also play dirty. Yes, you can approach them and bargain and try to arrange to make payments, but the key word is "try" and they'll want all of their money one way or another.
Anecdotal evidence of how the IRS plays a screwy game:
My dad (natural dad) built up a textile screenprinting business over a number of years from a tiny garage based operation to a million dollar a month business dealing with huge chain stores and multinationals.
In the process we accumulated and went through a number of investors. The last investor was so crooked he couldn't walk a straight line if you gave him a steel draftsman's ruler.
It turns out that he was in total cahoots with the bookkeeper who he brought in to the company, and keeping double books.
The naive fools that we were, when we confronted the investor, we demanded full control of the company. We ended up buying him out for a dollar.
For that dollar, we bought ourselves about $250,000 in Federal and State/Local tax debt, debt that we were now liable for.
I can't remember if we actually had a lawyer or not, but we went to the IRS and explained what had happened and explained that we wanted to make good, but remain in operation. A repayment schedule was recreated that basically amounted to us paying twice the amount of monthly taxes than we normally would. One half of this payment was to be used towards owed back taxes, the other half would be for current monthly operating taxes.
All fine and good. We're operating at a level where we can tighten our belts a little farther and make these payments.
Down the road almost a year and we discover that 100% of these payments were going towards back taxes, with none towards operating, effectively not doing anything to dig us out of the hole. We bitch and moan, we get the problem (supposedly) corrected and proceed with the properly channeled double-payments.
A year or two later we've paid up everything except about $6-9k out of over $200-250k. We're having a record-breaking gross income month - business is flowing, orders are coming in faster than we know what to do with. We were a healthy, thriving company. The back taxes would have finally been paid up in full that very month.
And here's where it gets really, really screwy.
The IRS assigns two new and totally green and unblooded agents to our case. They don't contact us. They apparently don't review the case or the most recent payment history. They apparently don't even talk to our old agents assigned to the case.
What do they do? They fucking seize the company, sealing and locking the doors, preventing us from operating, locking up our current orders and sending bad-mojo financial ripples and waves throughout our clients and suppliers. Over less than $10k in debt after a known good history of paying back over $200k in debt at a brutal repayment schedule without fail.
My dad went totally unhinged over this crap. I had to talk him out of going down to the local IRS building and smashing the place up with a 10 pound sledgehammer.
The new agents would not even listen to us or even consider the current operating history. This was their first "kill" and they wanted it at any cost. It was sheer insanity. And financial and government wonks wonder why small business - the backbone of American industry - have so many problems operating, and why so many jobs go overseas.
They locked us up, shut us down, and then held some pissant little auction for all of our equipment in our own shop. No one even showed up for the auction - except the guy across the street we were in cahoots with. We got him to buy all of the equipment in the shop for about $50k It was worth $250-500k as-is, used, and worth considerably more if we wanted to get it certified and maintained for resale.
The owed bank notes on the equipment came to an amount that left about $2,500 to the IRS out of the $50k they sould it for. So they got less than they would have if they had just let us stay in business for a month longer - not to mention ongoing further operating tax payments as a thriving business in the future.
As for the business owner across the street, we helped him turn our equipment around, sell it to the appropriate dealers and turn his $50k gamble into a nearly $150k gross sale. We got a $15-20k commission out of the deal, effectively making an order of magnitude more profit out of the clusterfuck than the IRS did. Not a bad way to profit all around out of a bad situation.
Anyway. Long story short, and the moral of the story:
Get a tax law specialist any way you can. The IRS rarely shoots straight. The play hard, and they play by their convoluted and mutable rules.
posted by loquacious at 8:42 AM on November 25, 2005 [1 favorite]
I know a lot of lawyers that I've met aren't very tech-savvy, and they do a lot of work on their computers. I have a sort of ad-hoc arrangement with the man my mom married* in that he can call me up whenever for tech support, and if I can help I do. In exchange I can call him up if I ever have legal issues, any time. He's a real estate specialist, so this is really handy when signing rental leases, which I've had him go over for me before, and it's nice to know that qualified eyeballs are looking over those obtusely-worded things. (*Tangent, I feel weird calling this man "step-dad" because "step-dad" seems too lukewarm, and "dad" is maybe a tad too strong. Though if I liked my natural dad any less I'd have no problems calling this man "dad")
Anyway.
Not only does the IRS play hardball, they also play dirty. Yes, you can approach them and bargain and try to arrange to make payments, but the key word is "try" and they'll want all of their money one way or another.
Anecdotal evidence of how the IRS plays a screwy game:
My dad (natural dad) built up a textile screenprinting business over a number of years from a tiny garage based operation to a million dollar a month business dealing with huge chain stores and multinationals.
In the process we accumulated and went through a number of investors. The last investor was so crooked he couldn't walk a straight line if you gave him a steel draftsman's ruler.
It turns out that he was in total cahoots with the bookkeeper who he brought in to the company, and keeping double books.
The naive fools that we were, when we confronted the investor, we demanded full control of the company. We ended up buying him out for a dollar.
For that dollar, we bought ourselves about $250,000 in Federal and State/Local tax debt, debt that we were now liable for.
I can't remember if we actually had a lawyer or not, but we went to the IRS and explained what had happened and explained that we wanted to make good, but remain in operation. A repayment schedule was recreated that basically amounted to us paying twice the amount of monthly taxes than we normally would. One half of this payment was to be used towards owed back taxes, the other half would be for current monthly operating taxes.
All fine and good. We're operating at a level where we can tighten our belts a little farther and make these payments.
Down the road almost a year and we discover that 100% of these payments were going towards back taxes, with none towards operating, effectively not doing anything to dig us out of the hole. We bitch and moan, we get the problem (supposedly) corrected and proceed with the properly channeled double-payments.
A year or two later we've paid up everything except about $6-9k out of over $200-250k. We're having a record-breaking gross income month - business is flowing, orders are coming in faster than we know what to do with. We were a healthy, thriving company. The back taxes would have finally been paid up in full that very month.
And here's where it gets really, really screwy.
The IRS assigns two new and totally green and unblooded agents to our case. They don't contact us. They apparently don't review the case or the most recent payment history. They apparently don't even talk to our old agents assigned to the case.
What do they do? They fucking seize the company, sealing and locking the doors, preventing us from operating, locking up our current orders and sending bad-mojo financial ripples and waves throughout our clients and suppliers. Over less than $10k in debt after a known good history of paying back over $200k in debt at a brutal repayment schedule without fail.
My dad went totally unhinged over this crap. I had to talk him out of going down to the local IRS building and smashing the place up with a 10 pound sledgehammer.
The new agents would not even listen to us or even consider the current operating history. This was their first "kill" and they wanted it at any cost. It was sheer insanity. And financial and government wonks wonder why small business - the backbone of American industry - have so many problems operating, and why so many jobs go overseas.
They locked us up, shut us down, and then held some pissant little auction for all of our equipment in our own shop. No one even showed up for the auction - except the guy across the street we were in cahoots with. We got him to buy all of the equipment in the shop for about $50k It was worth $250-500k as-is, used, and worth considerably more if we wanted to get it certified and maintained for resale.
The owed bank notes on the equipment came to an amount that left about $2,500 to the IRS out of the $50k they sould it for. So they got less than they would have if they had just let us stay in business for a month longer - not to mention ongoing further operating tax payments as a thriving business in the future.
As for the business owner across the street, we helped him turn our equipment around, sell it to the appropriate dealers and turn his $50k gamble into a nearly $150k gross sale. We got a $15-20k commission out of the deal, effectively making an order of magnitude more profit out of the clusterfuck than the IRS did. Not a bad way to profit all around out of a bad situation.
Anyway. Long story short, and the moral of the story:
Get a tax law specialist any way you can. The IRS rarely shoots straight. The play hard, and they play by their convoluted and mutable rules.
posted by loquacious at 8:42 AM on November 25, 2005 [1 favorite]
I had a very good experience with the IRS's own Taxpayer Advocacy Service. I don't know if the service is available to you because yours is a corporate tax matter, but I strongly recommend it for anyone with IRS problems. You'll be assigned a case advocate who'll help you navigate the dark waters of the IRS bureaucracy.
posted by TimeFactor at 11:28 AM on November 25, 2005
posted by TimeFactor at 11:28 AM on November 25, 2005
I can speak from experience in a personal tax matter. The Taxpayer Advocate ultimately solved our problem for us, and was remarkably customer service oriented by IRS standards, but didn't do much follow-up -- we had to initiate most important contacts.
What had happened was one subform had been separated from the packet and recorded separately. It was a liability for taxable social security. The taxpayer, however, had other deductions and overpayments such that the 1040 showed no liability. It came out in the wash. Nevertheless, the IRS somehow recorded the liability shown by this single subform as a tax payment owed. After a couple of letters, which the 800 help number told us to ignore if it was wrong, they passed this to collections.
IRS collections are mean. They don't listen to you when you say you have an explanation; they've, you know, heard it all before. They claim to have no ability to look at your tax records; all they have is a figure that you owe. They do not give you information on who in the IRS bureaucracy to call. They even brush off being told that you have contacted the advocate's office. IRS collections will tell your bank to put a hold on your money without blinking. During this problem, they did it twice.
If you can imagine working without all the cash in your checking account and a lot of the slack in savings covering overdrafts, then you can approach this problem as something to solve yourself. You can't? Well, then, get thee to the Taxpayer's Advocate office now -- well, Monday morning sharp. (Oh, they have people who work late, but you get the best results dealing with someone on the morning shift. Depending on your regional office, though, you may not get that.) You may be able to head this off by working through them.
Pay special attention to the Offer in Compromise program. The IRS is obligated by Congress to consider "reasonable" settlements. They don't have to accept them and can counteroffer, but this is at least one option, if you're unable to erase the liability completely.
I feel competent giving people tax advice, but I wouldn't presume to give someone legal advice. If there's any chance the IRS could come after you for money you just can't live without, having a lawyer will save your ass. Make sure you get someone with experience working with the IRS, not a garden-variety lawyer. These people have personal relationships with IRS auditors and so forth and remember the ins and outs of previous cases. This is more a matter of navigating a bureaucracy than defending yourself in court.
posted by dhartung at 12:25 PM on November 25, 2005
What had happened was one subform had been separated from the packet and recorded separately. It was a liability for taxable social security. The taxpayer, however, had other deductions and overpayments such that the 1040 showed no liability. It came out in the wash. Nevertheless, the IRS somehow recorded the liability shown by this single subform as a tax payment owed. After a couple of letters, which the 800 help number told us to ignore if it was wrong, they passed this to collections.
IRS collections are mean. They don't listen to you when you say you have an explanation; they've, you know, heard it all before. They claim to have no ability to look at your tax records; all they have is a figure that you owe. They do not give you information on who in the IRS bureaucracy to call. They even brush off being told that you have contacted the advocate's office. IRS collections will tell your bank to put a hold on your money without blinking. During this problem, they did it twice.
If you can imagine working without all the cash in your checking account and a lot of the slack in savings covering overdrafts, then you can approach this problem as something to solve yourself. You can't? Well, then, get thee to the Taxpayer's Advocate office now -- well, Monday morning sharp. (Oh, they have people who work late, but you get the best results dealing with someone on the morning shift. Depending on your regional office, though, you may not get that.) You may be able to head this off by working through them.
Pay special attention to the Offer in Compromise program. The IRS is obligated by Congress to consider "reasonable" settlements. They don't have to accept them and can counteroffer, but this is at least one option, if you're unable to erase the liability completely.
I feel competent giving people tax advice, but I wouldn't presume to give someone legal advice. If there's any chance the IRS could come after you for money you just can't live without, having a lawyer will save your ass. Make sure you get someone with experience working with the IRS, not a garden-variety lawyer. These people have personal relationships with IRS auditors and so forth and remember the ins and outs of previous cases. This is more a matter of navigating a bureaucracy than defending yourself in court.
posted by dhartung at 12:25 PM on November 25, 2005
The lesson learned from my IRS horror story (actually, fairly minor) is that they'll figure out anything missing from your tax records when you file for dissolution. It happened to me, it was their mistake, and it was a bitch to rectify- to this day, I honestly couldn't tell you if it's totally correct on their end.
posted by mkultra at 5:57 PM on November 25, 2005
posted by mkultra at 5:57 PM on November 25, 2005
This thread is closed to new comments.
posted by Admiral Haddock at 10:52 PM on November 24, 2005