Small Business IRS Tax Problems

Small Business IRS Tax Problems

The average owner of a small business typically reports a loss in their first year of operation. But when the IRS steps in, many first-timers do not even stand a chance. It is important to stay one step ahead of the game when it comes to obeying Tax Laws. Small Business owners need to make sure they avoid the common problems Small Businesses run into with the IRS.

941 Late Payment Penalty

You can incur a penalty for making payroll tax deposits late. This is sometimes called a late payment penalty. You can incur this penalty as well as other penalties for not taking care of payroll taxes properly and on time. 

Classifying Workers

It is a little tricky, but it is important to properly classify your Small Business workers. The two classifications are “Employees” and “Independent Contractors.” If Employees are mis-classified as Independent Contractors, they would avoid Tax Reporting. This is the same as stealing from the IRS, and the punishments imposed for this are not light. Form 22-8 “Determination of Employee Work Status for Purposes of Federal Income Tax Withholding” will help you determine the important differences between an “Employee” and an “Independent Contractor.”

Overstating Deductions

Knowing and taking advantage of Tax Credits is important if you want your Small Business to survive and thrive. But you can only deduct the cost of items you use for work. This means no deducting expensive vacations, limo rides, or new editions to your house. The deductions you claim must be reasonable and responsible. Additionally, you have to be ready to prove the deducted items are used for work. If a taxpayer is caught making false deductions, they will owe IRS back taxes plus penalties and interest. Do not get greedy when it comes to the IRS.

With proper planning and understanding, you can beat the IRS and avoid the Common Problems Small Businesses Encounter. Don’t forget that although there are many issues that come with owning a small business, there are also a few advantages. Do not overlook valuable Tax Credits. Practically everything purchased that goes towards operating your business is Tax Deductible. This means everything from pens and notepads to ovens, delivery trucks, computers, and more.

If you are in need of business tax relief call or fill out the form to connect with our IRS and State tax professionals that can help you resolve business tax issues.

IRS Business Delinquent Payroll Taxes Consequences

Being a small business owner is a liberating experience. But with the freedom, comes responsibility. It’s imperative to pay the IRS on time. You must make Business Payroll Taxes a priority. Many are not aware of it, but this can make or break your Small Business. It’s important to know the consequences of being Delinquent on Business Payroll Taxes so you don’t make a deadly mistake with your Business finances.

Failing to withhold payroll taxes is the fast track to trouble with the IRS (consequences of not withholding payroll taxes). The penalty for this equals the amount of the taxes that are owed. It is called the 100% Payroll Penalty or “Trust Fund Recovery Penalty.” The results of this mishap can be devastating for any Small Business regardless of how successful they are. If you are having issues with payroll taxes, it is possible to resolve these types of taxes, but it may not be easy.

When you neglect to pay Business Payroll Taxes on time you will receive a warning from the IRS. If the issue is not resolved in a timely manner, there are several consequences that can become reality:

• The IRS imposes a very harsh Penalty when Business Payroll Taxes are not paid. The penalty is 100% of the Taxes owed. This is called “Trust Fund Recovery.” Remember, when your Payroll Tax obligations are not met you are breaking a binding contract you have with the United States Government.
• IRC Section 6672(a) states that the blame for not paying Business Payroll Taxes goes to “every responsible person” who willfully neglected to pay the payroll taxes. This means Accountants, Bookkeepers, and anyone with check signing ability can get the blame for the taxes due.
• Even if there was no bad motive involved, the expensive “Trust Fund Recovery” penalty is imposed. For example, some Business owners fail to pay their Payroll Taxes out of desperation. They may have been trying to save the company from Bankruptcy or protect their employees. But the reasons why you are delinquent are irrelevant; penalties and back tax amounts due will still be imposed.

According to the IRS’s official website thousands of taxpayers have outstanding Trust Fund Recovery penalties as a consequence of being delinquent on Business Payroll Taxes. The amount of money is in the billions and it is still growing. You do not want to be another number in this equation. Take care of your IRS Tax issues as soon as possible. Contact us for a free tax analysis with no obligation.

IRS Trust Fund Recovery Penalty: Penalties for Payroll Tax Delinquencies

Congress created the trust fund recovery penalty (TFRP) as a civil penalty designed to encourage businesses to pay their federal withholding taxes, including income taxes and the employees’ share of FICA, which goes toward Social Security and Medicare, in a timely fashion. Federal withholding taxes may also be referred to as trust fund taxes or 941 liabilities. When an employer pays an employee, it withholds certain taxes and holds them in trust until it pays them to the U.S. Treasury by making a federal tax deposit. Essentially, the TFRP is an alternative way of collecting delinquent payroll taxes when the IRS is unable to fully collect them from the business, corporation, or organization. A person may be subject to the TFRP if the person is responsible to collect and/or pay withheld income and employment taxes, or to pay collected excise taxes, and willfully fails to either collect or pay them. If a responsible person willfully fails to pay the taxes, he or she may be personally liable for the TFRP in the amount of the unpaid taxes, plus interest.

Responsible people for the purposes of the TFRP include the following:

• a corporate officer, employee, director, or shareholder
• a partnership member or employee
• a non-profit organization board of trustees member
• a related controlling corporation, or
• another person with the authority and control to disburse funds.

A responsible person is a person who has the duty to collect, account for, or pay over trust fund taxes, or the power to control those activities. If the IRS believes that you may be liable, they’ll typically request a 4180 trust fund penalty interview.

Furthermore, the responsible person must have willfully failed to pay the withheld taxes, in that the person must have or should have been aware of the outstanding taxes, and either intentionally disregarded the law, or was indifferent to the requirements of the law. Willful behavior is intentional, voluntary, and knowing behavior, as contrasted with accidental behavior. The standard for willfulness in the context of the TFRP is less than that standard used in criminal proceedings, because the TFRP is a civil process. A common example of willfulness occurs when a responsible person uses withheld taxes to pay a different bill or operating expense, instead of paying the taxes to the IRS as required.

Calculating the TFRP Amount

The TFRP is equivalent to the balance of the unpaid payroll taxes, and is based on the unpaid taxes withheld and the employee’s portion of the withheld FICA taxes. With respect to excise taxes, the penalty is simply the unpaid amount of the collected excise taxes. IRS payroll tax penalties also include interest assessed on the TFRP, so the responsible person ultimately may end up paying an amount in excess of the unpaid taxes.

The TFRP Assessment Process by the IRS

First, the IRS will determine the identity of any person responsible for the taxes required to be withheld and paid on behalf of employees. This step of the process may involve personal interviews in order to determine the specific duties and responsibilities of persons involved with the tax withholding and payment process for a particular business or organization. There may be more than one responsible person.

Once the IRS has determined the identity of the responsible person or persons, the IRS will send a letter, which is entitled 60-Day Notice of Proposed Assessment, notifying that person that it will assess the TFRP. The letter gives the responsible person 60 days from the date on which the letter was mailed in which to appeal the IRS assessment of the TFRP, and explains the appeal process and rights. Whenever the responsible person files a timely appeal, the TFRP assessment period will extend to 30 days after the date of the appeals decision. If the responsible person fails to respond to the letter altogether, then the IRS will go ahead and assess the TFRP.

After the IRS assesses the TFRP, it sends the responsible person a Notice and Demand for Payment, which is an official IRS notice that demands payment from an individual or business. If the responsible person fails to pay as per the IRS demand, then the IRS can use its collection tools to collect the TFRP, which may include federal tax liens or seizure of assets. The TFRP is normally exempt from bankruptcy discharge, except in the case of Chapter 13 bankruptcy cases that were filed prior to October 17, 2005.

Solutions to the TFRP

The best advice for a business that wishes to avoid the negative consequences of the TFRP is to avoid it altogether in the first place. By ensuring that withholding taxes are paid in full and on time, you will not face the assessment of the TFRP. If you do find yourself in a situation where you are potentially liable for the TFRP, you should contact an experienced tax lawyer for help. With legal counsel, you may be able to enter into a settlement with the IRS or otherwise compromise the the amount owed.

CTA Reporting Requirements for Businesses

As of 2024, most LLC, corporations, and similar business entities formed under state law must file a beneficial ownership information report with the Financial Crimes Enforcement Network. The report requires information about the company and personal information about its main owners. Willful failure to comply can lead to penalties and criminal charges.

Resolve IRS Unpaid Payroll Taxes – Settle Small Business Tax

Resolving the issues that arise from being delinquent on Business Payroll Taxes is no easy task. However, in the mid 90s provisions were added to the Taxpayer’s Bill of Rights. They were designed to help Small Businesses that were just starting out. Do not be intimidated by daunting Tax Laws. You still have your Taxpayer Rights.

Appeal Payroll Taxes

Many Business Owners are unaware that they still have rights as Taxpayers. You have 60 days from when you get notice from the IRS to file an appeal. Appealing will buy you time, but it’s not a permanent solution. However, the extra time will allow you to consult with a Tax Professional or seek Professional advice.

First-Time IRS Offenders

There’s a law in the Taxpayer’s Bill of Rights designed to help fledgling Small Businesses. According to this law, the IRS can forgive the harsh penalties imposed when Small Business owners fail to deposit payroll taxes on time. But this only applies if you are a first time offender. The IRS can also abate penalties applied for sending the payments directly to the IRS instead of depositing it to the correct bank.

Paying Back Taxes

The truth of the matter is, Appeals rarely work. And even if you’re a first-time offender, penalties and back tax amounts imposed by the IRS may not be forgiven. When this is the case, it is important to pay off the tax liability as soon as possible. If the full tax amount is not paid off in a timely manner, the interest accrued every month can double or even triple the current back taxes due. If the option of paying off the back tax amount in full exists, it’s imperative to act on it and pay it off as a priority.

There are many land mines that come with the otherwise relative independence of being a business owner. It’s a good idea to hire Bookkeepers and Accountants to help relieve the stress and burden of dealing with IRS Issues. And if all else fails, you can seek advice from a tax professional.

IRS Letter 5699, Missing Information Return Form 1094/1095C

Applicable Large Employers (ALE) are classified as employers with 50 or more full time employees. If an (ALE) is flagged by the IRS for failing to file information returns per the Affordable Care Act (ACA) employer mandate they can be liable to an IRS penalty assessment. The ACA requires any organization classified as an (ALE) to offer their employees health insurance.  A failure to offer health insurance coverage can result in assessments by the IRS of as much as $3,860.00 per full time employee.  In addition, the IRS may levy additional assessments for their failure to file forms 1094C and 1095C or in the event they file them late.  The IRS is expected to begin enforcing ACA non-compliance or incorrect filings more aggressively in 2022 and beyond.

It’s vitally important employers with 50 or more full time employees understand the importance of compliance in this area. We discuss more about the consequences of letter 5699 and missing forms 1094/1095C and what to do if your business is dealing with these issues. 

IRS Letter 226J

This is the initial letter the IRS sends to ALEs to let them know that they could be liable for an ESRP, or Employer Shared Responsibility Payment. The IRS sends Letter 226J based on information the ALE provides with Form 1095-C and 1094-C, as well as individual income tax returns filed by the ALE’s employees. Upon receiving Letter 226J, the ALE can respond by indicating it agrees with the IRS concerning the ESRP or explain why it disagrees with the IRS.

Tax Concerns for S-Corporations

Electing to be taxed as an S-corp brings business owners a lot of benefits, but it also comes with significant obligations. You must file an S-corp return every year in addition to your personal income tax return. If you’re an officer who works in the company, you also must ensure that you are compliant with the tax code by paying yourself reasonable compensation. 

Small Business Tax Relief Process

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