Podcast (practical-tax): Play in new window | Download
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? It’s not a cookie cutter situation. It’s gonna be that you look at what that both the business owner and the business itself, what do they need? What is their real situation? And from that, build up the strategies of here is how to go and deal with it. And like I said, part of is having to have that hard look and go, is this business just in a temporary hardship? Or is it something that is fatal and not gonna be able to be changed? And being lawyers, we are trained to hope for the best, but have a strategy of what to do when it’s the worst.
Steve Moskowitz:
Chris, so far we’ve talked about a single business owner. Suppose you have this situation. What if there’s multiple business owners and the payroll taxes just hasn’t been paid? Can anybody possibly escape, not to be liable at all?
Chris Housh:
There are ways to do it and to go and have a word with somebody escaped. And I’ve actually had where the principal or the president of the company Fullon came in to the IRS meeting and said, “Please don’t go after the vice president. And he was only there as a figurehead. Didn’t actually do anything with the business. It’s all my fault, blame it’s only me.” And the government agreed. Part was that we could prove that there was no checks signed by that person. They couldn’t find any actual documentation signed by the person that was being allowed to get off
Steve Moskowitz:
And could you use that same argument when the president of the company isn’t so magnanimous or maybe is disappeared? Can you use that argument when somebody says, “Hey, look, I had nothing to do with this.” What can you do?
Chris Housh:
So in that situation, part of it is going to be, I have to pay attention to who’s my client. Am I there to represent the company? Or am I there to represent the individual owner?
Steve Moskowitz:
That’s a good point. Suppose John Smith came in. He said, “You know, I’m a partial owner of the XYZ company and the XYZ company hasn’t paid the payroll taxes. And the IRS is trying to hold me personally liable for this.” Is there any hope for him to just escape it, if you can to prove?
Chris Housh:
So if he comes in and he’s gonna be my only client, I don’t represent anybody else in the business. I don’t represent the business, just John. In that situation. Yeah, I started looking for what are the evidence? What’s the documentation? What are the elements that would’ve made it, where he could have had control or knowledge and the more elements I can prove that he didn’t have control, they didn’t have knowledge. That’s gonna make it where I can build that defense and be able to get him off. When was it that he first learned that the payroll was happening? One of the things they’re gonna ask me is was the internal meetings that he was involved in that would’ve been there? So I’ll ask, were there board meetings? Were there actual conversations with the owner? How much involvement did you have in the business?
If it’s that he really was not involved. That becomes a defense to go and be able to get him off. Now that said, if the IRS can’t find the president, the main person, there is a little bit more risk in that situation. So hopefully the government is having a easier time finding the person that was responsible than my client in that situation.
Steve Moskowitz:
And what about when company can’t pay their income taxes, what happens then?
Chris Housh:
Well, if the company can’t pay us income taxes, with that situation for first of all, we would look at what is it showing on the tax returns? Why is it that you’re getting that kind of liability? And look, potentially at what kind of structure you have? Because if you are S corporation that should have been just flowing through to the individual returns, but you may be having penalties for how you’re doing things, that’s it for the company. Then we go and say, “Okay, let’s look at you…”
Steve Moskowitz:
Can you explain to us the difference between an S corp and C corp?
Chris Housh:
Yeah. The S corp and C corp are the two main versions of corporations. A C corp is the default, but it’s also the thing that you should not do unless you’re really having a specific reason. The C corporation is double taxed and is taxed both at the corporate level. And then the distributions to the shareholders are taxed on the shareholders tax return.
Steve Moskowitz:
So they get taxed twice?
Chris Housh:
Yep, double tax. And the only reasons you should ever wanna leave your company as a C corporation is if you’re planning on putting your company stock up for sale on Nasdaq or the New York Stock Exchange, they require you to be a C corporation. If you plan on having more than 100 shareholders, which of course, even if be on the stock market is gonna have more than 100 shareholders, then you’re required to be a C corp.
Or if you have a foreigner as a share holding owner of the corporation, you’re required to be a C corporate to get the double taxation. Otherwise you should be an S corporation. The S corporation gives you the protection of the corporate shell, but at the end of the tax return, the profits get split down among the shareholders based on their percentages and has a report come out saying “Here’s a percentage of the income and deductions that go down to your individual return. And you’re taxed only at the individual level. The corporation pays no tax.” The only time the corporation that’s an S corporation has a liability would be that you filed late. You didn’t file your information reports on time, things like that. You have penalties assessed against it that we then have to work with.
And depending on the health of the corporation either, do an arrangement of payment for taxes being paid out at that level, or having it be that if the corporation’s not healthy enough, looking at what do you need to do to make the corporation be able to be fixed or die? If it’s that the corporation’s never gonna recover. Now, at the same time there is one other way that an S corporation can have a liability. And that’s relatively new, which is the IRS a few years ago, made it where they could do an audit at the corporate level. And the shareholders are able to vote to say, “Do you wanna have it where the corporation has to pay that tax of its future profits? Or do you have it just retroactively split out among all the shareholders?” So in that situation, we would then immediately go and say, “Can the corporations pay this and not make the shareholder have to do it, keep the tax at that level?” Which then would make it less profitable, corporation less profits going down to the shareholders tax return, therefore less taxes in the new years.
Steve Moskowitz:
So, Chris, what happens if somebody’s watching this webinar right now and say, “Oh, no, golly G whiz, where is C corp, nobody ever told us about an S corp. I sure wished we had been an S corp.” Is there anything can be done now
Chris Housh:
There are things that can be done. There is a way to go and file the S corp election. First of all, you could do the S corp election to change over now, as long as you don’t have those three conditions, I said that make you have to stay as C corp, right? So no foreign owners, not more than 100 shareholders, and you’re not being publicly traded.
Steve Moskowitz:
Most small businesses qualify for us.
Chris Housh:
Right. That said, I have had business at where somebody gifted shares to a foreign wife of a friend, and therefore they had to be C corp.
Steve Moskowitz:
Hence why it’s good to talk to your lawyer before you do something.
Chris Housh:
Exactly. But yes, most of the time you’re gonna qualify as S corporation. In that situation, you can file to go and have yourself changed over this year, but there’s also actually allowable way to go and have yourself changed over for years that have already passed. You can do a late S corp election. The IRS has to grant it, but you are a allowed to do it. One of the main conditions though, is that you have to have always treated your corporation in action and in taxation as if it was an S corporation. So as long as you were intending to have it flow through and be paid at the individual level, there’s a way to go and elect to have them go back. I think the record I’ve seen our office do is three years back and get the IRS to actually accept it. I usually wouldn’t push beyond two, but we have successfully gotten a three year look back once.
Steve Moskowitz:
Chris, what would happen in this situation? Business owner says, “Well, you know what? I got in real trouble here in business one. So I’m gonna go across the street and I’m gonna start business two, I’m gonna start with a fresh slate.” Does that work?
Chris Housh:
It depends. Now, first of all, please talk to your legal council before you do this. But what we are looking at, is it the same business or not? Is it that you’re doing essentially the same thing? If it is it’s called mere continuation and the government can chase it and make it where your new company has the same liability going forward. Is called successor liability in that situation. But yes, they can chase you that way. Now, if you do enough changes the business. So that’s not the same business. And then you can show that you’re not just doing this to go and run from a creditor. The new business doesn’t have the liabilities that follow the owner. So we have to look at the circumstances. It’s not a one size fits all answer, but if your business is changing, there’s a way to go and say that this does not get to follow you to the new business.
Steve Moskowitz:
Excellent. And let’s talk about if a business can’t pay their taxes. Are there solutions that we came up in part one of our webinar, would they pretty much be applicable to the business taxes here?
Chris Housh:
Yes. And so just in case you haven’t gone and listened to part one, first of all, we’re gonna advise that after you finish watching this one, go back, watch the episode one. But we discussed, installment payment agreements, being able to go and say, “Hey, look, this is what I can afford to do every month and be able to go and make those payments.” That is an option, penalty and payment.
Steve Moskowitz:
Well, before we leave that, how long can a payment plan be Chris?
Chris Housh:
They can go clear up to 10 years, to afford to go beyond the amount of time that they legally have to collect. There’s a thing called statute limitations, a law that says exactly how long they have to collect. They can’t go beyond that, but they sometimes will try and ask a business to sign paperwork, allowing more time. We of course always advise against it, but there are circumstances where if your feeder up against the fire, sometimes a person will make that decision. That that’s the best route, we again, advise against it unless necessary.
Steve Moskowitz:
So what happens if a business owner says, “Look, you know, I’m just way over my head with all these taxes. And I can only afford to pay X a month. And even if I pay it until the statute limitation runs, it’ll never pay it off.” What happens to the tax debt?
Chris Housh:
Statute limitations expires the government by law has to wipe out whatever amount of tax, penalty interest was not paid on that period, has to wipe out is required to go down to zero, no longer allowed to try and collect on it. They then go down to the next period. Now with business, there’s one special element. That actually is a little bit of an unusual element, which is the trust fund that we talked about earlier. If they were able to assess a trust fund, that usually ends up getting assessed, a year after the actual original liability, they can collect on that trust fund for 10 years from when the trust fund was assessed. So the business could be clean and clear because of statute limitations on period one. But the trust fund is still collecting for an extra year to two years, depending on when they made that assessment. If you are at risk of it being three years from when the payroll tax was originally owed, there’s then a legal argument that I would wanna present because the government’s not allowed to go and try and do an assessment that is too close to three years from when you originally filed that return without the payment. And so that’s a special argument that is done during the negotiations about trust funds.
Steve Moskowitz:
Chris, what happens if you have this situation, you have a woman that’s running a business and she’s married to a house husband and the business doesn’t pay the taxes. Can the IRS go to the house husband and say, “Okay, we’re gonna collect it from you?”
Chris Housh:
The IRS follows the state rules regarding community property. So I’m going to say for California and the community property states, the answer is yes. For other states, we would have to look at the specific rule of your state, of how they treat marital income, marital assets. But California, yes, they go and say that that house husband benefited from the income that was generated by the wife and the decision to not pay the taxes. That was done by the wife and her business and therefore that they can hold that individually. Now, while they’re still married, I still have to do the financial showing both of them. If it post divorce, then it becomes just only his separate financial. He can get a completely different dollar amount or agreement with the IRS than what the working wife got.
Steve Moskowitz:
hat about innocent spouse, would that help the house husband?
Chris Housh:
Innocent spouse is an option, but is still tied a little bit to, like I was saying for community property in California and any other community property states out that you might be in, what they’re gonna look at is did you benefit from the income that was generated by your spouse and by the taxes that were not paid? So in that situation, we have one client that we can demonstrate that the money was hidden and was not used for their benefit. Therefore their innocent spouse, they were injured and they got no benefit. But a person that you’re going and able to live and not be going GE verse scripting by, and then find out years later that your spouse was making tons of money. If you got the benefit of that, the government’s position is you’re still a responsible party. You benefited therefore you are subject.
Steve Moskowitz:
How about if the house husband had a prenup, would that protect them?
Chris Housh:
If you truly honor your prenup.
Yeah. So no co mingling of funds, no shared bank account. You pay your share of the household utilities, rent all that. Then you have a stronger argument because A, that money did not benefit you. You likely did not even know the money that was out there. So then you have a stronger case for an innocent spouse. Any of these kind of situations, you always wanna look at the whole situation, do they review of information. So with innocent spouse, it’s a little bit harder of a fight, but if you can go prove that you were not actually benefiting from the unpaid taxes, you have the route in. But also I should give you a warning. After the innocent spouse request is filed, the government will send a letter to your former spouse or your current spouse. If it’s a prenup currently existing asking them for their side the a story. So that might be a little bit of a scary element if you’re still married and living with the person with a prenup.
Steve Moskowitz:
Well, you know, when you talk about prenups, you know, you think about a couple that’s getting ready to marry. And prenup is not maybe the most romantic thing in the world, but when a couple has a discussion, they might love each other very much, and they might wanna share everything in their lives. But perhaps the business owner should say to the spouse, “Look, I wanna share all the good things with you, but I don’t wanna share the taxes.” So maybe there’s a reason to have a prenup to protect against taxes if something goes wrong in the business, what do you think about that?
Chris Housh:
Well, we’re actually recording this right before Valentine’s Day. I think it’s a great Valentine’s Day present to present to your fiance, a prenup. It makes for a great conversation.
Steve Moskowitz:
If him or her from being nailed on your taxes, you bet it is.
Chris Housh:
Not only the taxes, but also again, we’re lawyers we think of the worst case scenarios. Someone sues your business. The prenup helps to keep that part of the personal assets separate and not able to be attacked. There are lots of reasons and it’s not, “Oh, gee, I think maybe we’ll get divorced down the road.” It’s, there’s risk because I do things in the universe. A successful business person is at risk of a lawsuit. There’s a potential that an audit happens and the taxes are bigger than expected. And you don’t want your spouse or future spouse to be affected by it. Absolutely. This is something that can be presented and especially making it where that the other person knows. It’s not that you’re going. “I don’t think our relationship’s gonna survive.” It’s as you’re going, “I’m trying to minimize the risks to you for what things I see in the future for my business and for what I’m trying to do.”
Steve Moskowitz:
And also we have to concern ourselves the other way around where let’s assume the house husband had a bunch of debts including taxes, maybe the business owner who owes nothing in taxes would want to have the prenup, because if the IRS comes after the house husband, could that adversely affect the business?
Chris Housh:
It could, after all a lean against the family can make it harder for the president, the business owner to go and be able to get new loans to finance things for the company, therefore saying, “Hey, look, we’re gonna just separate this element out. Can make it where therefore we all do better and have a happier life.” It definitely is a factor.
Steve Moskowitz:
And also it would affect the business owners, partners, or shareholders, because that would affect the profitability of the business, or even possibly the viability. If the taxes are argument.
Chris Housh:
Right.
Steve Moskowitz:
You know, it’s funny. I just love talking about taxes so much. And I always get excited about it. And maybe laughs. But the people that know me well, know that I really mean it. And here it is. I know you have a lot more that you could say, you’d like to say, but it seems like we run up against the clock. So I’d like to thank Chris Housh, tax attorney, and EA for being with us. And Chris is happy to talk to you. I’m happy to talk to you, or any of the members of the firm here for you. Just call us at 888-TAX DEAL. That’s 888, T-A-X D-E-A-L, 888-TAX DEAL or moskowitzllp.com, moskowitzllp.com.
Outro:
You’ve been listening to the Practical Tax Podcast with tax attorney, Steve Moskowitz. To hear more podcasts, go to moscowitzllp.com/practical tax. The information contained in this podcast is based on information available as obtained at the date of its release. Moskowitz LLP and its affiliates are under no obligation to update this information if changes occur. Applying this information to yours specific situation requires careful consideration of all factors, which may be applicable. And any information is not to be considered tax advice or legal advice. Further, this is attorney advertising and the facts and circumstances displayed in this case are dependent entirely on the facts of that particular case. Please consult your tax advisor before acting on any matters discussed.