Articles Posted in Payroll Tax Problems

When to Use the IRS Voluntary Classification Settlement Program
The IRS Voluntary Classification Settlement Program (VCSP) allows taxpayers to reclassify their workers as employees for employment tax purposes and eliminate the risk of payroll tax problems caused by misclassification in previous tax years. In essence, the taxpayer agrees to classify its workers as employees going forward and pays a small portion of the employment tax liability that would have been owed for previous tax years if the workers were considered employees. In exchange, the IRS will not conduct a payroll tax audit based on worker classification for prior tax years.

The VCSP should not be confused with the Classification Settlement Program (CSP), which is available to taxpayers currently under an employment tax audit. The VCSP is not available to taxpayers who are currently under an employment tax audit.

Eligibility for the Voluntary Classification Settlement Program

How to Resolve a Payroll Tax Dispute
Payroll tax disputes often arise when a worker is paid as an independent contractor, but the IRS or California Employment Development Department (EDD) believes that the worker is an employee. There are some differences between federal and state requirements, but a business will often have to deal with both the IRS and EDD when a worker misclassification problem arises.

The 20-Factor Test

Many employers believe that as long as they have a contract stating that a worker is an independent contractor, they are covered. This is not true. A worker is legally classified as an employee or independent contractor based on the circumstances of the employment relationship.

The IRS Classification Settlement Program Can Reduce Your Tax Debt
The IRS Classification Settlement Program (CSP) is designed to allow businesses to settle a tax debt owed due misclassifying employees as independent contractors. Along with safe harbor relief under Section 530, the CSP can be an effective tool for businesses involved in payroll tax disputes.

The Costs of Misclassifying Employees

Many businesses would like to treat their workers as employees, but the status of the employment relationship is not determined solely based on the employer’s classification of the worker. Rather, the facts and circumstances of the employment arrangement will determine whether the worker is an employee of independent contractor. In particular, courts will look at the behavior control, financial control, and relationship of the parties when classifying a worker.

Can an Employee Be Held Liable for Their Employer's Unpaid Taxes
An employee can be held liable for their employer’s unpaid taxes in certain situations. While most businesses withhold their employees’ income and payroll taxes and then transmit them to the IRS, there are cases where employers either do not withhold taxes or do not give the withheld money to the IRS. Employees need to be aware of their responsibilities as both taxpayers and a person responsible for collecting and paying a business’s income or payroll taxes.

Liability for Employee’s Unpaid Taxes

If your employer fails to withhold income or payroll taxes from your paycheck, you are still responsible for paying these taxes to the IRS. If you do not pay these taxes personally, you may face tax penalties, and you may not be eligible for Social Security, Medicare, or unemployment benefits.

Tax audit
Getting a letter from the IRS notifying you of an upcoming tax audit is never a welcome event. At the very least, it can be  a major inconvenience. At worst, it could mean the possibility of criminal investigation for tax fraud. Knowing how to proceed when you are notified can help you prepare for the worst while hoping for the best.

Types of IRS Audits

Not all IRS tax audits are the same. When notified of an impending audit, carefully read the verbiage used in your letter. IRS tax audits are often pursued if information on your tax return doesn’t match the IRS records or inconsistencies are found, but they can also be random selection or for the collection of data. The type of tax audit requested can help you determine what you should do next:

payroll tax problems
As a California  employer, you are responsible for making payroll tax payments to the California Employment Development Department and the IRS. These payroll tax deposits must be made regularly, often monthly or weekly as taxes are withheld from payroll disbursements. If you become behind on making these deposits, you could face serious consequences and personal liability for the money owed. Knowing your rights, obligations and options is crucial to avoid the consequences of not paying these taxes on time.

The Trust Fund Recovery Penalty

Not making payroll tax deposits in accordance with the law is illegal, and collecting them is a high priority for the IRS. Payroll taxes are considered a trust fund tax, which means you are withholding taxes from your employees in trust for the government. Delaying payment of these taxes means you have “stolen” money that belongs to the IRS and you may be subject to the Trust Fund Recovery Penalty (TFRP).

S-Corp
The 2007 financial crisis and its aftermath fundamentally changed how Americans think about risk and business. Another effect of the financial crisis was creating a renewed urgency regarding balancing the federal government’s finances. While many in Congress focus on reducing expenditures, the IRS has continued its efforts to increase tax revenues through better identification of tax fraud and tax avoidance even with a decreased budget.

As has been seen in the context of offshore accounts, coming forward voluntarily, making a complete disclosure and taking steps to correct tax problems before the IRS identifies you leads to better outcomes in the majority of situations. If you are concerned that you may have taken overly aggressive positions to minimize taxes that passes through an S Corporation, an experienced lawyer can review your situation and provide peace of mind. If he or she does identify a problem, you can begin taking steps to correct it before being faced with an IRS audit or criminal tax investigation.


What are the tax differences between an S Corp and a C Corp?

prisoner
Temporary employment agencies have become a more prevalent part of the American work experience since the 2007 financial crisis and the difficult economic times that followed. While on one hand, temporary employment agencies can provide workers with an entry point into a new industry, on the other hand they require payment for their placement services that could otherwise be used to pay the worker a higher wage or to hire additional workers. Furthermore, when the temporary agency acts as the worker’s employer, certain duties and acts are required of the employer. Failure to satisfy these tax duties can lead to criminal prosecution and result in a prison sentence or significant monetary penalties.


How can an employer satisfy their obligation regarding business trust fund taxes?

Trust fund taxes are probably most familiar within the context of how a business withholds payroll tax from its employees’ paychecks every pay period. While the exact deductions on your paystub are likely to differ, commonly found ones include those for federal income tax, Social Security and Medicare taxes (FICA), state and local taxes, and voluntary deductions including an IRA or 401(k).

The 6th Circuit recently taught an expensive lesson to a Michigan couple about carefully following procedure when dealing with tax problems and subsequent loss of their $64,000 refund occurred because of a seeming minor error. Following an IRS tax dispute began, as the IRS’ records stated that the envelope containing the Stockers’ amended 2003 return was postmarked four days late. Compounding the Stockers’ tax problems, the IRS failed to retain the postmarked envelope in question. Seeking help in their tax dispute the Stockers brought suit, but the District Court granted the IRS’ motion to dismiss for lack of jurisdiction due to the suit being barred as past the three-year period for filing a claim for a tax refund. On appeal, the 6th Circuit affirmed.

The 6th Circuit was unmoved by the Stockers’ attempts to prove the mailing date of their return through means other than those set forth in IRC Section 7502. As the IRS’ records indicated that the returns were postmarked four days late, the Stockers could not prove timely delivery under IRC Sec. 7502(a)(1), which states that the postmark of the returns establishes the date of mailing. Additionally, Mr. Stocker’s failure to obtain the certified mail receipt precluded the use of IRC section 7502(c)(1), which states that the “date of registration shall be deemed the postmark date”. The court rebuffed the Stockers’ attempts to prove timely delivery through circumstantial evidence; rather, the Court stated that its own precedent prevented any other method of proof. Finally, the court held that the District Court had not abused its discretion in refusing to draw the inference that the Stockers had timely filed their returns because of the IRS’ failure to retain the postmarked envelope in violation of internal policy.

Despite the seemingly minor nature of the Stockers’ mistakes, the 6th Circuit was highly unsympathetic to their plight. Ultimately, the court reiterated that only certain procedures are available to prove timely filing, and the Stockers’ own mistakes precluded them from receiving relief, despite their innocent nature. While calling it “unfortunate” that the Stockers could not prove the timeliness of their return, the court sent a strong message to taxpayers that it was unwilling to make exceptions for even the most innocent of mistakes.
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In a criminal tax case last year the United States Court of Appeals for the Eighth Circuit upheld the conviction of a man for willful failure to pay the employment taxes of his healthcare staffing business. U.S. v. McClain (8th Cir. 2011). In United States v. Francis Leroy McLain, No. 0:08-cr-00010 (D. Minn. Jul. 20, 2009) the United States District Court for the District of Minnesota determined that Francis McLain knew he should have classified the workers for his temporary nursing staffing agency as employees but willfully chose not to.

How did McLain’s payroll tax problems morph into criminal tax problems? First, he never filed federal payroll tax returns (Form 941) for the periods from the fourth quarter of 2002 through the fourth quarter of 2005 and only made one payment in December 2002 in the approximate amount of $4,200 for employment taxes although the total amount due was approximately $345,000. McClain’s defense was that the nurses were in fact independent contractors and not employees, and even if they weren’t he had a good faith belief that the workers were employees.

The courts were not impressed with McClain’s arguments since he had a history of misclassifying his temporary nursing staff as independent contractors. In a previous civil tax case involving a predecessor company the IRS argued that McClain willfully misclassified his workers and failed to remit the payroll taxes to the IRS. That lawsuit was eventually settled and the IRS obtained a judgment for the unpaid employment taxes, penalties and interest. As a further part of that settlement McLain agreed that “with respect to any other business similar to the … entities that he might own, operate, or control in the future, he would treat as employees for tax purposes all workers who performed functions or duties that were the same or similar as the functions or duties performed by the nurses and nursing assistants who worked for the…entities. In other words, defendant McLain was obligated to withhold and pay over employment taxes for the nursing professionals who worked for any of his entitles.” In addition, McLain did comply with a Minnesota’s statute requiring that nurse staffing agencies like his certify that they are treating their nurses as employees and not independent contractors.

Sometimes it’s a gray area whether to treat workers as employees or independent contractors; but the wrong decision can have detrimental consequences to an employer, and its officers, resulting in large payroll tax liabilities and even tax evasion or tax fraud charges. The IRS has a number of criteria they use in determining whether a worker is an employee or an independent contractor and these federal criteria may differ on a state level as well.
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