Blog

The Long-Term Fix to not making your Payroll Tax Deposits

In 2020 I wrote a blog post about your options if your cash flow was not adequate to pay your payroll tax deposits. These options are bleak – cut your payroll, close altogether, or the head-in-the-sand approach of just hoping things will improve. I did leave out one major idea – fix your cash flow.

Identifying the Real Problem

Cash flow problems come from two sources. Either you are profitable, but the timing of inflows and outflows is off. Or you are not profitable enough.  When it comes to timing problems, the answer is simple – speed up collections or defer payments (hopefully to someone besides the IRS). The lack of profits is a much bigger problem and must be solved or you will be out of business.

What Can Be The Fix?

Most small business owners do a good job at avoiding unnecessary expenses. This is because they are highly incentivized and deeply involved in operations.  It’s not likely that they will find salvation by cutting costs. Most of us miss the single area of our business that can have a big and immediate impact on profits – our pricing. One study from some years back reported that the average small business spends approximately 8 hours per year working on its pricing policies. Yet, a small increase of just 1 or 2 percent can have an impact in the area of 8 to 10 percent on pretax profits.

There are multiple ideas on how to raise your prices without driving off your customers. Some of them include:

  • Offer new products or services to existing customers (the new and improved approach).
  • Bundle your existing products and services.
  • Switch the subscription model for services.
  • Allow your customers to design their bundle of services by providing a menu on your website.
  • Use psychology to make your price seem smaller.
  • Change your marketing message to emphasize the value of the product or service to the customer.

These are just a few pricing ideas. My pricing manual has over 25 different pricing models that are worth considering. The main point is that you have to do something, and pricing is your best bet at fixing your cash problems.

The IRS and Electronic Accounting Records

One of the concerns many taxpayers have in an IRS audit is the request to turn over the backup files for their electronic accounting software such as QuickBooks. You have no choice but to comply with this request. The IRS has the law behind them on this request. Here are a couple of pointers from the IRS Q&A on Electronic Accounting Software Records.

  • You must provide them with an exact copy of the original backup files. Making any changes will smack of fraud. If you have a representative licensed to practice before the IRS who participates in making and producing the modified file, they could be in violation of IRS rules as well.
  • Downloading all the transactions to Excel and turning them over to the IRS will not work. They want an exact copy of the files.
  • The IRS can also request the data for the month before the audit period and the month after the audit period. If they find this information inadequate, they can expand their request.
  • You cannot close the accounting periods before the backup if it will condense the data. They want to see all the transactions, not totals.

Compliance with an IRS Records Request

Now here is an interesting question when it comes to electronic accounting records. The IRS’s latest pronouncement regarding these records was written in 1998 before web-based software became available.

I am a software developer and can tell you that almost nobody does backups to some sort of floppy disk anymore at the client level. As a provider of web-based software, we do automatic backups of the databases daily, but this is not the same thing as backups of a PC-based accounting program. The database backups generally overwrite old backups with all the information from the current database. What’s more, the accounting programs are completely separate from the databases that hold each individual client’s data. The program files pulling the data from the database have undoubtedly been changed many times to improve the input and report screens. There is no way to get back to the previous version from some years back.

If summoned, a web-based software provider can produce a file, but we don’t have a way to guarantee that the database is exactly what it was at the end of the tax year and you can be certain that the program files are not the same.  The result is that web-based accounting software files are not in compliance with IRS electronic records rules as they are written on the IRS Q&A.

Transcript Monitoring Can Save Your Golden Goose

You have made your business a success. So much so, that you have been able to hire people to take over the boring stuff, such as writing checks and processing payroll tax returns. What can go wrong with this scenario?

The Scenario

The trusted accountant embezzles some money. Small amounts at first, but his or her perceived needs continue to grow so they continue the embezzlement game.  To keep in the game, they need to provide reconciliations to show that all the money flowing through the bank accounts is accounted for. No problem. Let’s just continue to record payroll tax deposits in amounts equal to amounts stolen. But if we file the payroll tax returns, the IRS will start sending notices saying, “where is the cash?”. Problem solved, lets just not file the returns. After all, the IRS will take forever to follow up on the missing returns, especially if I mark the last one “final”.

The Result

The result is that the IRS eventually does follow up and the missing payroll deposits amount to the hundreds of thousands. The company will most likely not have the ability to recover and go out of business. The IRS will then access a penalty equal to 100% of the employee withholdings and social security taxes on the owner who is now back to being an employee of someone else.

The Solution

There is a new option in town to avoid this kind of disaster. Different tax representation firms use different names, but it essentially involves software regularly querying the IRS databases and reporting to their client business owners when the payroll tax returns have been filed and the amounts of payroll deposits actually paid. This allows the business owner to have a 3rd party backdoor check on his trusted employees.

If you have any questions about how this service works, just give me a call at (352) 317-5692 or email jim@taxrepgainesville.com.

 

Have you heard about the Virtual Currency Trap?

The first question on the 2020 1040 was “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” A lot of people are tempted to answer No when they know they answer Yes. If, for no other reason, they consider this to be none of the government’s business. Particularly since virtual currency is thought to be a highly encrypted secret.

How the Trap Works

Here is the trap. The IRS has issued John Doe Summons for information about American investors to companies like Coinbase. These companies make it easy for non-tech people to invest and use virtual currencies. The IRS summons allowed them to get the names of people who have accounts with them. How well the IRS can track individual transactions is a question, but they certainly have enough information to catch a lot of people who answered the virtual question the wrong way.

This is a significant trap. The criminal division is actively looking through their records of Form 433s filed to find people who answered no of the form. Form 433 is used to report financial information for people looking for a payment plan, offer-in-compromise, or trying to get the IRS to give them some room before making payments. People who signed these forms with the wrong answer are setting themselves up for criminal prosecution for perjury.

How do you want to bet?

Here is one thought to keep in mind. Even if you think the IRS cannot get these records today, what about a year from now, or two, or three years? Fraud does not have a statute of limitations and I would certainly not like to bet against the government’s abilities to get hold of these records at some time in the future.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

What should you do if you received an IRS Letter 11?

The IRS got back into the collections business on 6/15/21 with the release of over 5 million Letter 11s. This is the first significant collections activity in over a year due to the pandemic. Letter 11 is the formal announcement of the IRS’s intent to begin levy actions. This means they will start seizing the bank accounts, investment accounts, and some portion of the debtor’s wages.

The letter gives the taxpayer 30 days from the date of the letter to respond. There are three major options:

    • Set up a payment plan,
    • Making an offer-in-compromise, or
    • Provide proof that they do not have the financial means to make any payments.

What should you do?

If you are a do-it-yourselfer type, then the best action is to go to the irs.gov website and signup for a payment plan. If you cannot qualify for the automatic plan or do not have the cash flow to handle the calculated payment, then bite the bullet and hire someone who has experience with IRS Collections. Proving you are uncollectable or making an Offer-In-Compromise is going to require a lot of financial analysis that is out of the skill range of most individuals.

What should you NOT do?

Ignore them. Nobody likes being ignored and the IRS is no exception. Also, they are not going to accidentally forget about you. Sooner or later, they will begin to seize your cash accounts. Letter 11 is the IRS’s way of suggesting that you come to the table and begin negotiating with them.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

What does the IRS mean when it talks about ‘Tax Compliance’

Being in Tax Compliance is a necessary step before you make a deal with the IRS regarding back taxes. What the IRS means by this is that all tax returns that are due have been filed and that estimated tax payments and withholding to cover the current year taxes are being made. The reason for this from the IRS point of view is why waste time making deals if the problem is going to continue to grow.

Latest IRS stats are released

The IRS issued its “Data Book” for FY 2019. This is an 80-page report on IRS activities for the 12 months ended 9/30/19. The most useful information that I can find in it is in regard to Offers-in-Compromise. Offers are where the IRS accepts less than the full amount owed and writes-off the balance. This is the fabled “pennies on the dollar” that you see on TV ads.

Only 33% of the 54,255 offers were accepted with an average offer amount of $16,177. They unfortunately do not report on the number we would really like to know – the average write-off amount. It would be very interesting to know if the write-offs average north of $200 thousand dollars. Well maybe that is not all that important. Given that the IRS has the best collection tools around, they are not likely to accept an offer unless they thought it was the best deal they could get. The reality is that Offers are not the cake walk that the TV commercials display.

It is no secret as to why 2/3 of the offers are rejected. Either the taxpayer is not in compliance with filing and paying their current year taxes or the offer amount was too low. The IRS uses a formula based on the taxpayer’s equity in assets they own plus their future projected cash flow. Failing to do this calculation in advance of filing the offer means the taxpayer is shooting in the dark.

 

Renegotiate your IRS Payment Plan!

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS.

If you are one of the many people hurt by the impact of the Covid-19 virus and have an existing installment payment plan in place, now is the time to renegotiate. If you qualify for the streamlined plans, simply go online to your account using one of these links:

Revising this agreement does not require any additional information submittals if you still qualify under one of the streamlined plans.

If your situation is dire, then you need to contact the IRS and ask for Currently Not Collectable Status. This will require that you fill out a Form 433 regarding your assets and income. The Currently Not Collectable status results in the IRS suspending any collections actions for at least 18 months. Given their current back logs, those currently in this status will probably be given a pass for a much longer period.

Renegotiating now is a much better alternative to simply defaulting.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com.

 

Are You One of the 7M Non-Filers?

Are you among  an estimated 7 million ‘non-filers’ in the USA? If you are, I’ll share bad news and good news. But first let’s look at the term non-filer:

Definition of a Non-Filer

According to Farlex Financial Dictionary (2009, accessed June 21, 2020),

“A non-filer is a person or corporation who does not file a tax return by the required date. In general, a person who has filed taxes once must continue to do so for the rest of his/her life (or existence, if a corporation).”

Let’s break that down a bit:

  • You’re a non-filer if you didn’t file in 2018 but did in 2017
  • You’re still  OK if you haven’t filed for 2019; the filing date was moved to July 15 2020 due to coronavirus
  • You’re a non-filer if you haven’t filed federal taxes in ten years (or 2-9 years for that matter) but did for some prior year(s), as required.
  • You’re a non-filer if you’ve never ever filed taxes (and were not exempt from filing).

As you might imagine, the longer it’s been, the more complicated it can be to get caught up, and the heavier the potential consequences in terms of interest, fees and penalties (25% of the original amount owed). If you have not filed because you know you’ll have tax debt you can’t pay, avoiding these penalties is your top priority.

I can guess the question many want answered: “What’s  my chance of staying  a non-filer forever—of flying under the radar ’til the statute of limitations runs out and I’m home free?”

Here’s the reality check, some bad news followed by good news:

The Bad News About Being a Non-Filer

The bad news (it may be news to you) is that if you are owed a refund you must claim it timely (within 3 years) or lose it. Read more about this in my post about the non-filer who believes all is good as the IRS owes him.

The other bad news  for non-filers is that data being collected about us in this digital age is being  scrutinized by IRS like never before. At one time it was easier to ‘get lost in the crowd’ and not file federal tax returns. But the IRS now has programs to identify and collect from people who are not filing and should be. The IRS is using public and private databases such as driver license records. By cross-referencing databases they can determine who is likely to be earning money that would require them to file.

The Good News for Non-Filers

What many others want to know of course, “Is there a legal way out that won’t bankrupt me or put me in money misery for ever?”

The first piece of good news for non-filers is that regardless of how many years have passed since you filed, to ‘catch up’ you only need to file the last six years. This fact could positively influence your timing. The second piece of good news is that the IRS wants a fresh start with non-filer citizens. It wants to kiss and make up, and get paid something. The steps to get square with the IRS are not complex, but choosing the best option for  your financial situation can be. You might also need help devising and carrying out a strategy to pay the least amount. That’s where I come in as your tax advisor and representative. If you’re a non-filer and have decided to explore getting square, I recommend you take me up on a free, confidential phone consult.

I’m CPA Jim Payne, your tax advisor and representative. I look after your interests. I look forward to serving you, saving you money, and releasing you from much of the stress and anxiety of dealing with the IRS or State of Florida tax authorities. Please text or call me at 352-317-5692 or email me for your free phone consult.