“We’ll try to cooperate fully with the IRS, because, as citizens, we feel a strong patriotic duty not to go to jail.”
–Dave Barry
Several years ago, a private investigations agency found itself in serious trouble with the Internal Revenue Service (IRS).
One of its employees had suddenly quit the company–leaving behind a major financial disaster.
That employee–whom I’ll call Pete–had been tasked with sending payroll tax records to the IRS. The company’s owner, Bill, assumed he had carried out his assignment.
Until he learned from the IRS that they had never received the records.
Consider the potential consequences:
- Failing to timely and properly pay federal payroll taxes results in an automatic penalty of 2% to 10%.
- Similar state and local penalties apply.
- Failing to properly file monthly or quarterly returns may result in additional penalties.
- Failing to file W-2 Forms results in an automatic penalty of up to $50 per form not timely filed.
- A particularly severe penalty applies where federal income tax withholding and Social Security taxes are not paid to the IRS.
- The penalty of up to 100% of the amount not paid can be assessed against the employer entity as well as any person (such as a corporate officer) having control or custody of the funds from which payment should have been made.
About 70% of the annual revenue collected by the IRS comes from payroll taxes. Under-reported and unpaid employment taxes account for about $72 billion of the United States tax gap. So the IRS makes the collection of payroll taxes a high priority.
No doubt about it–Bill was facing serious trouble.
What to do?
Fortunately, Steve, one of Bill’s employees, had a B.A. in Communications and had worked as a newspaper reporter.
When Bill told him of the calamity he was facing, Steve offered his best advice: Immediately contest the charge that he had been delinquent in providing the records. And explain to the IRS–in writing–what had happened.
Bill agreed.
First, Steve interviewed him at length to make certain he fully understood the circumstances leading up to his present crisis.
Then Steve sat down and typed up a letter–on office letterhead stationery–to the IRS. Letterhead would give it an official appearance–and Steve wanted every advantage he could get.
Steve offered a straightforward presentation of what had happened: Pete, the number-two man in the company, had been entrusted with submitting payroll tax records to the IRS.
Apparently nursing a grudge against the company, he had, in fact, done nothing of the sort.
Instead, he had dumped the records in a box and stashed this in a locked filing cabinet.
Then he had given notice and left the company. Later, an investigation of his office computer revealed that it had often been used to access pornography.
Steve emphasized that Bill’s company had previously had an unblemished record for meeting its payroll tax obligations on time. And he stated that the newly-found records had been sent to the IRS by registered mail.
Finally, Steve wrote that Bill was prepared to fully meet his financial obligations to the IRS. But he asked that Bill not be penalized for the irresponsible actions of a single, malcontented employee.
The result?
Bill ended up paying only those monies that he legally owed. He was not forced to pay a penalty.
So what are the lessons to be learned from this episode?
- In dealing with an agency as powerful as the IRS, don’t ignore its letters and/or phone calls.
- You have nothing to gain by pretending it will go away. It won’t.
- If you owe money, don’t deny it.
- Remain calm, even if you feel angry or afraid.
- Don’t use profanity or insults.
- Don’t try to play tough-guy with the IRS. Even the Mafia fears this agency.
- If you have a legitimate reason for having missed a payment, say so.
- Remember that everything you say to the IRS–verbally or in writing–is considered evidence given under oath.
- If you lie and get caught, you can face perjury charges as well as those for failing to comply with tax laws.
- Offer to fully pay any monies that you legally owe.
- If these amount to more than you can meet in a single payment, say so. Ask the agency to set up a plan by which you can pay it off in installments.
- If the agency balks at cooperating with you, contact a veteran tax accountant or attorney.
- The best accountants or attorneys for dealing with the IRS are former agents now working in private practice. They not only know the tax laws; they know the best ways to short-circuit an IRS audit and/or penalties.
