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Withheld Tax: What Business Owners Should Know

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There's a lot of information business owners need to know to be prepared for the upcoming tax season (for instance, those who owe payroll taxes need to be ready for the IRS to collect January 3, 2022). In his latest column, Julian Block addresses the Great Resignation, how to nudge clients who are slow to turn information in and more.

Dec 8th 2021
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Accountants who like to talk taxes with clients should throw in a reminder about the government’s most unpopular agency. Clients should never forget that the Internal Revenue Service expects its due. 

What can happen when that doesn’t happen? An ensuing fight that’s guaranteed to be uneven, as the agency has the Internal Revenue Code on its side to help collect.

That kind of outcome prompted me to devote several columns to help the accounting community. Which accountants? The ones who seek to enlighten clients who operate businesses with employees and consider themselves entitled to repeatedly flout long-standing rules for how and when they’re supposed to remit payroll taxes to the IRS. 

A low-key approach for accountants: Remind clients that they can wind up personally liable for unpaid taxes and interest charges. 

How accountants could respond when clients ignore reminders. Just be more forceful. 

Tell clients that they’ve been misled by cascades of fake news that they’ve read in print and electronic publications and have heard from talking heads who interminably blather that the IRS has morphed into an under-staffed and under-funded agency that’s completely powerless to enforce the tax laws. While for sure, it needs and ought to receive more staff and money, it hasn’t become a toothless tiger. 

IRS staffers are able to enforce rules spelled out in precise detail in Internal Revenue Code Section 6672. It authorizes firm and swift actions against companies that withhold income and Social Security taxes from employee paychecks and fail to pay those taxes on time to the IRS.

The typical culprits. More in a moment on personal liability and when it kicks in. First, let’s get a handle on what kinds of outfits maneuver to sidestep Section 6672.

The miscreants mostly are small or medium-sized closely held companies overwhelmed by predictable problems during their ongoing struggles to survive. They’re battered by the pandemic; short of operating cash; and unable to borrow from banks or other conventional sources. 

What’s their likely fates without quick infusions of funds? They’ll go under.

The problems that bedevil owners of cash-strapped companies. They’re continually pressured to scrounge sufficient funds to meet gross payrolls. 

Another Sisyphean task: placate understandably skittish suppliers disdainful of offers from owners to guarantee payments of existing and future debts. When might suppliers become willing to extend additional credit to them? Only when owners actually submit some payments of existing debts, and do so on checks that don’t bounce. 

“The Great Resignation.” Let’s pivot to owners who are unyielding in their unwillingness to acknowledge who now occupies the catbird seat. It’s no longer themselves. 

Just who are their replacements? Their employees, who are outspoken in asserting their refusal to remain in unsatisfying jobs.

Consequently, some of them have quit to take better-paying positions. Or, at least, they’re looking. Especially, those who are accustomed to high salaries and possess skills that are tough to replace in tight job markets.

Rosy outcomes for the ones who jump ship. They’ll readily find work with competing companies. Others are more adventurous; They’ve decided to launch business ventures and become their own bosses. 

How and why owners opted for no-brainer solutions that got them into tax trouble. What they did: paid employees their net salaries or wages and didn’t make the required corresponding deposits of hefty amounts of withheld income taxes and Social Security taxes with the IRS. What they should’ve done: strictly comply with those requirements. 

Why didn’t they? Because, rationalized these ever-optimistic honchos, the pandemic likely is in its last stages; and business inevitably will pick up. Plus, it was an article of faith with them that their companies were going to repay what they’d temporarily “borrowed” from the IRS. 

Their Panglossian approach reminds me of a Lorenz Hart lyric, “It Never Entered My Mind.” So too, it never entered their minds that IRS investigators would firmly and swiftly swoop down on them because they used withheld taxes to make up for temporary cash shortfalls. 

Not as an aside, did they wonder whether to check beforehand with their accountants? Nope.

How badly things can turn out when the unexpected happens. Many thousands of individuals who played games with withheld taxes were stunned by what befell them after their outfits didn’t pay those taxes. Because they became personally liable, the IRS could grab funds in their bank accounts and retirement plans or seize other personal assets. 

100 percent penalty. Section 6672 authorizes the IRS to assess a penalty equal to 100 percent of the amount due against the people who are responsible for collecting or paying withheld taxes and who willfully fail to collect or pay them.

What’s next. Part two will discuss who are “responsible persons.”

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