Pay Payroll Taxes Or Go Out Of Business?

We have talked before about the “big boy” penalty. It is one of the harshest penalties in the tax Code.

This is a payroll related penalty. It is not because you were late with a payment or failed to send in a return on time. No sir, it kicks in when you do not send the government any money at all.

And I am reading about two guys who decided to play big boy. One of them surprised me.

The company itself was based in Rhode Island and provided wireless internet in public spaces. Think Facebook at the airport, for example.

Business tanked. Cash was tight. Vendors did not get paid, including the IRS.

The company needed help. They hired Richard Schiffmann as president in October, 2004. In October, 2005 he brought in Stephen Cummings (who had worked there previously as a consultant) to be chief financial officer.

Cummings quickly found out they had problems with back taxes.

The Board granted check-signing authority to the pair: Schiffmann up to $100,000 and Cummings up to $75,000.

The two tried; they really did. But there was nothing there. The Board fired the two in June, 2006.

You know that the IRS eventually knocked on the door. They were angry and they wanted scalps. They went after Schiffmann and Cummings for the big boy penalty.

In the literature, this is known as the trust fund recovery or responsible person penalty. It addresses the income and FICA taxes withheld from employees. Mind you, the IRS wants the employer FICA also, but it is emphasizing the employee withholding. The IRS takes the position that this was never the employer’s money, whose function was solely to transfer the money as agent for the employees to the IRS.

The penalty is 100%.

It is intended to be Defcon 1.

The IRS went after Schiffmann for $394,334 and against Cummings for $254,280.

Think about this. You got hired. You were there for nine months. I doubt you got paid anywhere near $254,280. This is the lousiest job ever.

The two fought back, although there were some procedural misses we will not discuss but which leave me scratching my head. The two for example raised the following arguments:

(1) Schiffmann argued that he did not learn of the liability until late 2005. The most he could be liable for is two or three quarters, which would not add-up to $394 thousand.

He had a point. The penalty technically goes quarter-by-quarter.

But only in a classroom or in a textbook. In the real world, the IRS will argue that – if you could write a check – then you could have written checks for both current and past payroll taxes. Those past taxes become your problem.

And Schiffmann could write checks up to $100,000. Cummings could write up to $75,000.

Gentlemen, let me introduce problem. Problem, let me introduce gentlemen.

(2) They argued that all monies were encumbered and spoken for. They remitted what they could.

This is the “I had to pay … or the business would have folded” argument.

The IRS will respect encumbrances, but there better be a legal obligation. A pinky swear is not enough. 

The IRS will not respect a responsible person prioritizing them down, when the IRS had as much right to what money may exist as anyone else.

Schiffmann and Cummings could not meet that test.

(3) The Board would not let them pay certain bills.

More specifically, the Board would not let them pay taxes.

Now we have something. The IRS looked into this. It decided that there were two directors who raised a fuss, but it also decided that those two could be outvoted by the remaining directors.

And the directors never formally voted on a resolution, so the IRS could presuppose that the two would have been outvoted.

Then the IRS made an interesting observation: EVEN IF the Board has prohibited the two from paying the taxes, the most that would have happened is that the Board would have joined them in also being subject to the penalty. It would not have gotten Schiffmann and Cummings off the hook.

The two were held responsible.

Cummings was the one who surprised me.

He used to be an IRS field auditor.

The 2014 Tax Act and Professional Employer Organizations (PEOs)

We know that Congress passed, and the President signed, the Tax Increase Prevention Act of 2014 at the end of last year. This is the tax bill that retroactively resurrected certain tax deductions that many taxpayers have become used to, such as deducting sales taxes (rather than state income taxes)  should one live in Tennessee, Florida or Texas or deducting (a certain amount of) tuition payments if one’s child is in college.

There is something else this bill did that was not as well publicized.

It has to do with professional employer organizations, known as PEO’s. These are companies that provide human resource (HR) functions, such as the paperwork involved in hiring, as well as running payroll and depositing payroll taxes and other withholdings.

There has long been a hitch with PEOs and payroll taxes: the IRS considered the underlying employer to still be liable for withholdings if the PEO failed to remit or failed to do so timely. The IRS took the position that an employer could not delegate its responsibility for those withholdings. To phrase it differently, the employer could delegate the task but could not delegate the responsibility.

You can guess what happened next. There were cases of PEO’s diverting withholdings for their own use, then going out of business and leaving their employer-clients in the lurch. If you were one of those employer-clients, the experience proved to be very expensive. You had paid payroll taxes a first time to the PEO and then a second time when the IRS held you responsible.

The answer was to watch over the PEO like a hawk. The IRS encouraged employer-clients to routinely go into the electronic payment system (EFTPS), for example, to be certain that payroll taxes were being deposited.

That unfortunately collided with many an employer’s reason to use a PEO in the first place: to have someone else “take care of it.”

Back to the tax bill. Stuck in with the tax extenders was something called the ABLE Act, which is a Section-529-like-plan, but for disabled individuals rather than for college expenses.

Stuck (in turn) onto the ABLE Act was a brand-new Code section just for PEOs. The provision requires the IRS to establish a PEO certification program by July 1, 2015. There will be a $1,000 annual fee to participate, but – once approved – the IRS will allow the PEO to be solely responsible for the employer-client’s payroll taxes.

You have to admit, this is a marketing bonanza if you own a PEO. It will separate you from a non-PEO who is bidding on the same prospective client.

The PEO will have to post a bond in order to participate in the program. In addition the PEO will have to be audited annually by a CPA. The PEO will have to submit that audited financial statement to the IRS.

I do not know the answer as of this writing, but I have a strong suspicion the AICPA was in the room when that audit requirement was included. Why do I say that? Because only CPAs are allowed to render an opinion that financial statements are “presented fairly in accordance with generally accepted accounting principles.” 

NOTE: That would be CPAs who practice as auditors. There are CPAS who do not. For example, I specialize in taxes.

There is – by the way – risk to the PEO. This is not a one way street. The PEO will be responsible for the payroll taxes, even if the employer-client does not pay the PEO.

What ObamaCare Tax Forms Should You Expect For Your 2014 Return?

Are you wondering what, if any, new ObamaCare tax forms you will either be receiving in the mail or including with your tax return come April?

This was a topic at a tax seminar I attended very recently. What may surprise you is that the ObamaCare tax forms are still in draft; yes, “draft,” and I am writing this in the middle of December.

Let’s go over the principal tax forms you may see and how they fit into the overall puzzle. The 2015 filing season will be the initial launch, and some rules have been relaxed or deferred until the 2016 filing season. This means you may or may not see or receive certain forms, depending upon the size of your employer and what type of insurance is offered. Let’s agree to speak in general terms and not include every technicality, otherwise we will both be pulling out our hair before this is over.

The key form (I suspect) you will receive is Form 1095-B.

Form 1095-B

You will be receiving the “B” from the employer’s insurance company. Its purpose is to show that you had health insurance (“minimum essential coverage” or “MEC,” in the lingo), as failure to have health insurance will trigger a penalty. The form has four parts, as follows:

(1) The name and address of the principal insured person (probably you)

(2) The name and address of the employer

(3) The name and address of the insurance company

(4) The name and social security number of every person covered under the policy for the principal insured person. There are boxes for all 12 months, as the ObamaCare penalty is a month-by-month calculation.

What if your employer did not provide health insurance and you purchased coverage on the exchange? Now we are talking Form 1095-A, and the exchange will send it to you. It has three parts:

(1) The name of the principal insured person, as well as information about the marketplace itself and some policy information.

(2) The names and social security numbers of those covered under the policy.

(3) Monthly information, such as the premium amount and the amount of any subsidy (“advance payment”) received.

Form 1095-A

You will have received this form because you or a family member obtained health insurance through the exchange. You already know that the principal insured person (likely you) has to settle up with the IRS at year-end, comparing his/her household income, any subsidy received and any subsidy actually entitled to. The information on the “A” will – in turn – be reported on that form, which we will discuss in a minute.

We still have one more “1095” to talk about: the 1095-C. Frankly, I find this one to be the most confusing of the three.

Form 1095-C

The employer issues the “C.” Not all employers, mind you, only the “large employers,” as defined and subject to the $2,000/$3,000 penalty for not offering health insurance or offering health insurance that is not affordable.

You will not receive a “C” in 2015. Rather, you will receive one in 2016 if you were a full-time employee anytime during 2015. It can be included with your 2015 W-2, should your employer choose.

It has three parts:

(1) Employee and employer information, including identification numbers and addresses

(2) Recap of insurance coverage offered the employee, detailed for each month of the year. There are a series of codes to fill-in, depending upon a matrix of minimum essential coverage, minimum value, affordability and availability of family coverage.

(3) The third part applies only if the employer is self-insured.

BTW, you may have read that there is 2015 transition relief for employers having between 50 and 99 employees. That applies to the penalty, not to filing this paperwork. An employer with between 50 and 99 employees still has to file the “C.” You will receive this form in 2016 - if your employer has at least 50 employees.

NOTE: The IRS has said that employers can file this form “voluntarily” in 2015 for the 2014 tax year. Uh, sure.

Let’s recap. You would have received the “A”or “B” from a third party and (unlikely) a “C” from your employer. You now have to prepare your individual tax return. What new forms will you see there?

If you acquired insurance on an exchange, you will receive Form 1095-A. You will in turn use information from the “A” to complete Form 8962. Since you are on an exchange, you have to run the numbers to see if you are entitled to a subsidy. Combine this with the possibility that you received an advance subsidy, and you get the following combinations:

(1) You received a subsidy and it is exactly the subsidy to which you are entitled. I expect to see zero of these in my practice.

(2) You received a subsidy and it is less than you are entitled to. Congratulations, you have won a prize. Your tax preparer will include the difference and your tax refund will be larger than it would otherwise be.

(3) You received a subsidy and it is more than you are entitled to. Sorry, you now have to pay it back. Your refund will be less than it would otherwise be.

(4) You received no subsidy and you are entitled to no subsidy. I expect this to be the default in my tax practice. I suspect that we will not even have to file the form in this case, but I am waiting for clarification.

What if you did not have insurance and you did not go on the exchange? There are two more forms:

(1) If you have an exemption from buying insurance, you will file Form 8965. You have to provide a reason (that is, an “exemption”) for not buying health insurance.

(2) All right, technically the next one is not a form but rather a “worksheet” to Form 8965. The difference is that a worksheet may, but does not have to be, included with your tax return. A “form” must be included.

Form 8965

Form 8965 Instructions and Worksheet 

You are here if you did not go on the exchange and you do not have an exemption. You will owe the ObamaCare penalty, and this is where you calculate it. The penalty will go from here to your Form 1040 as additional taxes you owe.

And there you have it.

By the way, expect your tax preparation fees to go up.