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Unfiled payroll tax returns




I have a tax client that has not filed their Forms 941s for many years.(five or more probably) They do their own payroll and related reporting. They withheld the taxes, but never filed the 941s. They issued W-2s, but did not file copy A with social security administration. Because he did not pay his 1040 tax for last 2 years (filed these, but did not pay), IRS collection paid him a visit. IRS collection guy noticed all of the employees working, and is now asking about payroll taxes. Client filed Texas Workforce Commission reports quarterly. Estimated payroll tax liability for last 3 years amounts to over $100K. He is a sole proprietor (Schedule C). I contacted a bankruptcy attorney, and he suggested that we go back and prepare all unfiled 941s. Any suggestions on what direction to go regarding the payroll taxes? All equipment, etc is collateral on loan at bank. Thanks

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"I contacted a bankruptcy attorney, and he suggested that we go back and prepare all unfiled 941s." Just prepare them and don't pay? Direction: normally you start at the beginning and go forward and have IRS apply taxes first.

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Attorney suggested to prepare them to get some idea of how much total tax will add up to. Then, file returns. Client has no ability to pay.

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File the returns and prepare a 433-A. Inform the client that he MUST begin making payroll tax deposits immediately. He cannot continue to accrue payroll taxes.

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I must admit that I am not very sharp on payroll taxes , but do I understand correctly he withheld SS, etc from his employees, and neither paid the taxes (his share nor employees)? So, he not only defrauded the government, but also his own employees. I thought that when you did not pay what has been withheld from employees it got criminal real quick compared to just not paying income tax. Enlighten me!

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"criminal" may be a harsh term, Snow, but it was certainly wrong and didn't help anyone. It only postponed the inevitible. It would have been better for everyone if he had closed down the first quarter he couldn't pay all his operating expenses including withheld taxes. Then he could have gotten a job himself and not been in bankruptcy today.

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I hope I don't sound like an apologist, but the employees did get credit for the taxes withheld on the W-2s. I just hope his wasn't one of those W-2s. I found Sales Tax theft far worse for in that situation, I have paid 6-7% more for a product than necessary.

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because the employees got 'credit' for the withheld taxes, but the employer didn't pay them in, the IRS is out the money. Because the IRS is out the money, the US Treasury is out the money. Because the US Treasury is out the money, it must raise revenues from other taxpayers. Because I am one of those other taxpayers, I have paid to finance this losing business. I want my money back. He took food off of my table. I am angry that he cheated ME.

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I hope this is a new client and not someone you have had for five years while this nonsense has been going on. It is definitely time for one of those Come to Jesus talks because your client has been stealing from the government and stealing his employees. By not filing the W-2s with Social Security, he is depriving his employees of retirement benefits they are entitled too. The employees must not be intellectual bright lights because Social Security sends annual notices of reported wages to all workers over age 25 and if any of them were on the ball, they would have noticed the shortage. If the IRS revenue officer is sharp, he or she will refer the matter to Criminal Investigation because this case has everything CI wants: There is a pattern of non-compliance (five years) significant tax liability (over $100K) and multiple actions taken to conceal the liability (failure to file returns accompanied by failure to file W-2s) and knowledge (he filed the state counterparts.) If the client has any brains, he should file the delinquent returns before a special agent comes out and reads him his rights. After is too late. I don't think bankruptcy would help him much if he doesn't have much because the taxes and penalties will not be dischargeable. A Chapter 13 might help but he would have to pay all his current income and payroll taxes and pay the back taxes. If he isn't even paying the current bills, how does he expect to pay them and back liabilities and keep going?

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My comment referred to Snowbird's 'defrauded his own employees' which is true in that they are taxpayers also, but I didn't take the original in that sense but rather that they were also 'out' the money withheld. To me, a responsible party filing a 1040 with a W-2 showing withholding that has not been paid is filing a false return.

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Mscash, how many of your clients read the annual statements they receive from the SSA? I know my own husband doesn't look at his. I would bet many people don't look at them, just as they don't look at their own paystubs or reconcile their own bank accounts. I wouldn't be so quick to say the employees would have noticed the shortage. Should they have? Yes. But did they bother to look? Probably not.

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I have this exact situation. New client - they haven't filed payroll tax returns for all the 5 years they've been in business, they haven't made any tax deposits ever, and issued "fake" W-2's to their employees, without ever filing W-3s. Their tax liability, state and federal combined is close to $300,000. This doesn't even include any kind of penalties, interest, etc. What should their first step be: should they file all the unfiled reports and wait for the notices to start coming? I can't imagine that they've never received any kind of notice from the IRS or the SSA, or that any of their employees haven't noticed that their wages haven't been reported on their annual SSA notices. But there's no one from the IRS knocking on their door about this. Should we refer them to a criminal attorney, or is that jumping the gun? Is a good faith effort to at least file the returns a way to start working with the IRS on this, or will they have no mercy? The sad thing about this - the wife was handling all the finances for the business, but the husband, who is the sole shareholder, didn't know that she wasn't filing these reports or making tax deposits. She's obviously devastated at the realization of how this will impact them. I hope she's told him by now . . . Thanks for any guidance you can offer.

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My girls have taken shopping sprees before that have not made me happy. With this, she better hope he loves her, because this is see ya later type stuff. Figure that penalties and interest will double the amount due. Someone needs to tell this guy the deal. Sad.

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the returns must be filed to start the statute of limitations on assessment (of the TFRP) and collection. Best bet after returns have been filed might be to close the corp and let the IRS assess the TFRP. There are some pitfalls and traps to watch out for with this. You probably want to work with, or refer the client to, an Enrolled Agent, attorney, or CPA experienced in these matters.

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If Copy A of the W-2s did not get filed with the SSA how could the employees get credit for the taxes?

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presumably they filed a 1040 and showed the credit for taxes withheld. That's what all of my 1040 clients do, at least. the issue for the employees isn't Federal taxes withheld, it is Social Security earnings, as Jossie points out

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We are a small CPA firm, and I am a CPA, but we haven't dealt with this situation before. We've dealt with clients who haven't made tax deposits here and there, but never for the entirety of their existence as a business. I just want to make sure we don't do the WRONG thing and screw it up for them. I think we are planning on referring it out to someone who has dealt with this before, but just wanted to make sure that filing the past returns wasn't going to mess anything up. I'm assuming this is the correct first step, then? What do you think are the chances of criminal charges against this client? I don't think she's told her husband yet. I agree - a very serious situation for their marriage, unfortunately. It truly is sad.

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it is criminal to not file a required return that's why I always advise 'file'. The IRS just wants the tax, they don't want to put taxpayers in jail.

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Thanks Kevin.

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Also, if they used the money they did not use to pay taxes, for houses, boats or fancy cars, then the possibility of criminal fraud goes up. If they used the money to put back into a failing business, then criminal charges are not likely.

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Dumb question - is the penalty assessed an amount over and above the taxes actually owed (thus, in addition to . . .), or is it just that the corporate veil will be pierced and the responsible persons held accountable for the amount actually owed. In other words, total liability = $100,000, of which trust fund amount is $50,000. Is the total owed $150,000 at this point, or is it just that the responsible persons are being hit with the $50,000 liability? (As I said, I've never dealt with this before. Just want to make sure I have the right interpretation.)

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the TFR penalty is the amount withheld. Collection may only be made once. The service will treat payments by the corp in the most advantageous way possible to the service (interest, penalties, non-trust fund taxes). The service will treat the payments by the individuals as TFRP payments (including interest and penalties thereon), again in the most advantageous way to the service. Supposidly, payments on the actual trust fund taxes by the individual would be noted in the corporate 941 tax file.

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Ok - thanks!

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I'm surprised the employees didn't get notices, at least from the state, saying they could find no record of the taxes being withheld.

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If the W-2s have not been filed with Social Security, the employee's accounts don't get credited for the wages and their benefits are premanantly reduced. It is time to play social worker and get those suckers filed along with the 941s. If an IRS special agent has not yet come out and read the employer his rights, he can derail any potential criminal case by getting the returns filed now.

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Never heard again from Rrgcpapc from two years ago. It would be interesting to know what the outcome was.

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I just met with a prospective client in Bakersfield, CA a couple days ago with a virtually identical situation. It is VERY common. Thousands upon thousands of businesses start off this way and never get off the treadmill. They fear, correctly to a certain extent; that by not filing the IRS has no information and they don't get into the system. However, there are several scenarios that can set this spiraling out of control.
What I am doing with this new client is to gather up all of the W-2/W-3 information he has from his bookkeeper (I'm sure his books are not in great shape) and start to piece together seven years of 941's, 940's and the California DE-6's and & DE-7's. Of course, he also has missing 1040/540 returns, but until I get his payroll info it will be far tougher to do those.
Then, we'll begin taking Collection Information Statements for the IRS and state of California. We know he has some liabilities, but until we contact the agencies, IRS, FTB & EDD, we won't know what they've done. Presumably some returns have been filed for him, but one never does know. Nothing surprises me after 23 years.
The chances of a full pay are zero. He has some equity in his home, but the California Central Valley has been severely hit so it will end up as Currently Not Collectible or as an Offer with the three agencies. It is a very long, expensive, time consuming process, but when no returns have been filed for seven years and no money paid for just as long, there is no other possibility.
Fortunately, this client "gets it" and the outcome won't be painless, but the pain can be limited.

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I'm wondering what will happen once we file all the old payroll tax returns. I'm assuming my client will begin receiving notices from the IRS and the state agencies. What is the usual course of action with something like this?