Summer 2017 The Subject is Taxing!
by Stanton B. Herzog, CPA
Stanton B. Herzog, CPA, principal in the firm of Applebaum, Herzog & Associates, P.C., Northbrook,Ill., serves as ERA’s accountant and is a regular contributor to The Representor. He is available to speak at chapter or group meetings on a variety of financial and tax-related topics. He also participates in Expert Access, the program that offers telephone consultations to ERA members. You can call Stan Herzog at 847-564-1040, fax him at 847-564-1041, or e-mail him at firstname.lastname@example.org
The IRS has managed to convince the courts that the individuals in management have a trustee type relationship to turn over payroll taxes to the IRS. They are merely middle persons; the money is never theirs.
We have much political agitation. We are going to have big changes to income taxes; we are going to simplify the tax code; and we are going to change the IRS. In the meantime, however, we are not going to do anything.
What has happened in the interim seems to be a renewed interest in payroll taxes. What could possibly be new? They follow an employee’s pay like night the day. Yet, here we go. These cases all arise out of the employer’s responsibility to pay withheld taxes to the IRS. The IRS has managed to convince the courts that the individuals in management have a trustee type relationship to turn over payroll taxes to the IRS. They are merely middle persons; the money is never theirs. If they don’t send payroll taxes to the IRS they are stealing it, and they can be held PERSONALLY liable.
Outside payroll service
We begin with a case recently decided that dealt with a genuine problem that any management could face. The firm in this case hired an outside service to handle its payroll. Many firms do this. ADP is one example, though definitely not involved in this case. The service properly collected funds to cover the wages and taxes from the company and properly withheld taxes from the employees’ wages. The service just didn’t bother to turn the funds over to the IRS.
While not specified in the case, the assumption has to be that the payroll service spent the money on itself and had nothing left. The IRS came after the company, even though it had done everything right. The court ruled that the company still had the responsibility to make sure the taxes were paid, and would have known if it had obtained copies of IRS correspondence or had checked on its filing status with the IRS. The company was held responsible for all unpaid taxes. Thus it was out the tax money twice, plus penalties and interest.
When is a tip not a tip? You and some friends eat at a restaurant. The bill comes, you arrange payment and add a tip. The IRS considers this a tip as long as you, the customer, decide the amount. But suppose on this occasion there are six in your party. Very often, the restaurant adds a flat 18 percent or 20 percent tip to the amount, while encouraging you to pay more. The IRS says the flat addition is not a tip. It is simply additional wages paid by the restaurant to the waiters and support staff included in the tip; regular withholdings should be deducted.
The third case is an important win for detached management. The collectability by the IRS for unpaid payroll taxes from management individuals rests solely on their involvement in the payroll process, causing a custodial relationship. The IRS has used this successfully to enforce rulings where management never touched the payment process, but ordered its employees to pay suppliers or others rather than pay the payroll tax liabilities. We finally have a case where management was not involved in such a practice. Instead, it kept telling its employees to pay the taxes, changed employees when it found the taxes weren’t paid and even hired an outside company to make sure the payments were paid. Still, payments to the IRS fell way behind; the payroll returns were filed but not paid. The IRS went after the company officers, but lost because it couldn’t prove the officers had participated in any way with the mismanagement of the money. So there is a way out of the liability; if management has no control over either its employees or the disbursement of funds, it can avoid the IRS collection process.