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.
