Learn about options for dealing with tax debt and what happens when you can’t pay your taxes. This episode focuses on businesses with tax problems. This week Steve is joined by his long-time colleague Chris Housh. Chris chairs the firm’s tax resolution and business entity compliance practice groups and is the Vice President of the Golden Gate Society of Enrolled Agents.
Listen to the full episode to learn more!
Episode Transcript
Intro:
You're listening to the Practical Tax podcast with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz LLP, a tax law firm.
Steve Moskowitz:
Welcome everyone. And thank you for tuning into our podcast. And this is part two of what happens when taxes can't be paid. Part one was for individuals. Part two is for businesses. And I'd like to introduce my friend and colleague, Chris Housh. Chris is both a tax attorney and EA, and Chris and I have worked together at the firm for over 20 years. He's the head of department that handles these type of cases, basically when a person or a business just can't pay their taxes. And in part one of this, we talked about what happens when an individual can't pay their taxes. Part two we're gonna talk about businesses and there is certainly some overlap between parts one and parts two. But in the business area, we're gonna go over some areas that we didn't go in individually because they don't apply to individuals. So, Chris, I have a question for you. What happens when somebody comes in and says, "I can't pay my payroll taxes?" What's the difference between payroll taxes and income taxes?
Chris Housh:
Payroll taxes is one of the special kinds of taxes that exist, sales taxes also in this boat. They're called trust fund taxes. And the government's explanation of it is that the person that you collected that tax from, trusted you to pay it over to the government. Your employee trusted you to go and take that tax that you with held out of their paycheck, to pay it to the government on their behalf. Your customer that you charge sales tax to trusted you to go and put that sales tax into the hands of the government. So with that, the government has that as one of the few things that can break out of a corporate or LLC shell and go against the individual alongside of the business.
So the IRS on a payroll tax liability is going to ask to have an interview with the head of the company and any other responsible people that were in charge of making that decision, to be able to assess against the individual, a penalty to collect against that tax. Now they are only allowed to go and put to the individual, the amount of tax that was withheld from the people that are trusting. So your employee, they can only do to you the owner, the portion that was actually withheld from the paycheck, they can't go in and hold the businesses, share of FECA or the interest penalty assessed against the corporation. They can't do that against an individual.
Now at the same time what they then do is ask to go and collect against the business and against the individual at the same time to pay into the same pot. Once the pot is full, they can't collect more than what's owed. So what often happens is at the business level, they have four pots for each year, that is getting paid by the business for payroll taxes. The employers share of FECA, the employee share of FECA, the employees federal tax withholding, and then the penalties and interest. At the business level you go and first pay the business' liability then the amount that was withheld from the employee's paychecks, and then the penalties. The business owner, if they're making a payment agreement at the same time, they're paying in solely into what was withheld out of the employees. So that that part gets filled up faster. And if you owe on multiple periods, they can start having that payment go down to period two, while the business is still paying period one. I've had situations where the business is still paying on period two, but the owner is paying on the taxes that were withheld from period five. And the reason that they do this, is because when your employee files their tax return at the end of the year, the government doesn't tell them that you didn't pay the withholding, they'll actually cover you.
Because they don't wanna hurt the employee that didn't have that money in their paycheck. So they'll go and allow that person to get a refund or to say that they paid their taxes down based on what you've reported. And they're needing you to pay that back as fast as possible because they don't wanna be treated as a lending bank. So that's an element that happens there and it does get complex on that negotiation. And one of the things I often try to do is convince the government that as long as the business is gonna make the payments that they should let the owner not have to make the second round of payments at the same time, unless the business falters on making those payments.
Steve Moskowitz:
Chris, what happens if a business owner comes in and he says that he or she they're really doing poorly, and he's thinking about doing a bankruptcy and discharging the landlord and his vendors. And he'll just go ahead and include those payroll taxes and his bankruptcy. How about that?
Chris Housh:
Well, sadly, payroll liability taxes are not dischargeable in bankruptcy that will survive and follow you when you come out. Now, at that moment, if you've gotten rid of the business, you can't pay. That's part of why they then go after you individually. But if your business is at that stage, it's one of those elements of going and saying, maybe what you can do is instead look at other ways of dissolving the business and make it where you're just paying all that trust fund, the money that you withheld out of the employee's payroll.
There's some techniques that I do to go and try and minimize that element. And they also reach out to your creditors to see if we can make it where you don't have to go through the whole bankruptcy process, but dissolve the corporation. It depends first of all, what entity form you have. This works for corporations, works a little bit less for LLCs, doesn't work for sole proprietors. But also where are you in the business? Is it really time to throw in the towel, versus is it that you just need a restart? There are different avenues. And that's one of the things I try and do with those business owners is talk with them, do a real look at, "Where are you right now with the business? Is it that it's really down and you're not gonna be able to recover, or it's just a temporary hard time?" If it's temporary, we can look at different avenues.
We can look at how to go and get where the government gives you the time to go and negotiate and get things taken care of. But if it's time to actually throw in the towel, maybe look at depending on what your entity is. Can I just do certain things to dissolve it and make the things go away without having to go through the headache of going and using the bankruptcy court and using instead the California Corporation Code to go and make it where you can be protected in other ways.
Steve Moskowitz:
So it sounds like a really essential element here is making a deal, hence why we took the name 888-TAX DEAL, for our telephone number. Tell us a little bit more about making these deals 'cause you've made so many of them over this 20 plus years.
Chris Housh:
With the government is that a big part of it is showing them, "Here is what's going on. Is this a temporary or a long-term, a problem? What are you doing to try and solve things?" If your business is gonna be continuing, first steps are going and making it where the current periods are covered, are paid, are filed. So many people end up going and just constantly throwing to the back periods and not fixing the current period. Therefore you're just adding more and more headache because you have more and more things that are backed up. And by the time the payments finally get to the current year, a ton of interest is accrued. You end up owning so much more.
So instead, getting yourself corrected. And that makes the government happy because they see that you are taking a serious interest in getting the problem fixed, and then going and working the deal with them saying, "Okay, here's the finances. This is all that can be afforded to do towards the back at this time. What can we do about those elements?" The government works with me on that part, but they first wanna see that you're taking the steps to fix the problem. And we work with you on being able to look at your finances, look at how to go and make it where you can do these things properly. Now let's say that it is that the business is not gonna be able to recover. In that situation, I talk with the government about that as well. Talk with them about timing, do the elements of what we can potentially do on getting things resolved. I also look at, has the government acted on all their different elements? We had one client who had a large amount of payroll tax that hadn't been paid, but the government had only got around to doing the paperwork on two out the 10 periods, to go and be able to go and do that trust fund forward. We were able to actually get the corporation dissolved and closed, before the government ever got around to going and assessing the trust fund.
Therefore the government could go and collect that against the owners of the business because they didn't do the paperwork they needed to do, saving the client money for a situation they couldn't handle. Sally was a business that was having to close after decades of being around, but we were able to go and help that owner who had tried everything and spent the last dimes that they could to be able to go and get that closed away and taken care of. So you have to always look at what's the organic issue?
