Let’s say you paid your payroll taxes. Is there any way you would have to pay those same payroll taxes twice? Yes, and this sad situation happens to unsuspecting business owners every day. Is there any way this could get even worse? Yes. On top of paying the same taxes twice, you could have to pay a Trust Fund Recovery Assessment (known as the “100 percent penalty”) under tax code Section 6672.
In this blog, we first tell you the true story of a taxpayer who got mugged by his payroll taxes because he had to pay them twice. Then, we’ll explain precisely how you can spend just a few minutes every once in a while to make sure that you never suffer this double payment of payroll taxes.
Ray Fouche hired Manzoor Beg to help him with a payroll tax problem: he had not paid his payroll taxes for five quarters.
Mr. Beg falsely held himself out to be a certified public accountant (CPA). He convinced Mr. Fouche that he could solve Mr. Fouche’s payroll tax problem, and thus Mr. Fouche engaged Mr. Beg and:
- paid him $30,000 to get started,
- promised him 25 percent of the payroll taxes he saved, and
- gave him power of attorney.
The Payroll Checks
In addition to Mr. Beg, Mr. Fouche hired a payroll service to prepare the Forms 941 for the five quarters that were to be the subject of Mr. Beg’s interaction with the IRS. The payroll service completed the work, and Mr. Fouche wrote five checks to the IRS for the payroll taxes that were due.
Mr. Fouche then gave the five 941s and the five checks to Mr. Beg, who promised to deliver the checks to the IRS revenue officer with whom he was negotiating.
As you may remember, Mr. Beg lied about being a CPA. That was just one of many lies. Here’s what happened next. When Mr. Beg got his hot little hands on the 941s and the checks, he did the following:
- Altered the checks payable to the IRS so that they were now payable to him. He then deposited and cashed the checks for his personal use.
- Created a replacement set of 941s, signed them, and filed them with the IRS, where they fraudulently reduced payroll tax liabilities by $371,000. (Remember, Mr. Beg gets a 25 percent commission on the savings.)
- Drafted replacement checks payable to the IRS to cover the now lower and fraudulent payroll tax liabilities.
The United States discovered Mr. Beg’s scheme and prosecuted him. Mr. Beg pleaded guilty to filing false tax returns and then died while awaiting sentencing.
Tax Court and Appeal
Remember, the government never got the payroll tax money. Mr. Beg took it and used it for personal purposes. The IRS went after the tax money in court. To make a long story short: the Second Court of Appeals overturned the tax court’s decision and ruled that the IRS may proceed against Mr. Fouche’s company, City Wide Transit, Inc. for the unpaid payroll taxes.
If City Wide doesn’t pay, the IRS has Mr. Fouche as a responsible person and can make him personally pay the taxes and penalties. Keep this in mind: most business owners have responsible-person status and hence are personally liable for the payment of payroll taxes and penalties.
Here is a summary of what happened:
- Mr. Beg stole a big chunk of Mr. Fouche’s payroll tax money.
- Mr. Beg received $30,000 up front and a 25 percent commission when he filed the false payroll reports.
- Mr. Fouche is out the payroll tax money, the $30,000 fee, and a big commission.
- Mr. Fouche’s company or Mr. Fouche personally will end up paying the stolen payroll tax money to the IRS. This means that the payroll taxes are paid twice: once to the crook and once to the IRS. (And there could be penalties, too.)
Mr. Fouche’s trouble started when he allowed his companies to steal the payroll taxes in the first place. He likely thought of it not as stealing but as simply letting his companies borrow the government’s payroll tax money. He now knows that not sending the payroll money to the government is a direct violation of fiduciary responsibility and one that can cause him, as a responsible party, to personally have to pay the money.
Of course, hiring the fake CPA embezzler was one huge problem. But truly, how likely is it that Mr. Fouche would have known Mr. Beg was a crook? Did Mr. Beg have a crooked history? Did he have good references? He likely had credentials that made him look like a good solution.
Let’s start with a sad fact: you need to recognize that your small business is at risk of fraud and embezzlement by your employees and contractors. Thus, you need to establish controls and checks and balances to ensure that things are as you want them to be. Your payroll can be embezzled by your payroll service or by an employee. This means you should not trust anyone with your payroll. And keep this in mind: if someone embezzles your payroll tax money, you:
- are out the money,
- get to pay the embezzled tax money plus penalties to the IRS, and
- are likely to incur legal fees—perhaps some hefty ones.
Spend Minutes So This Never Happens to You
Here’s a totally underutilized trick to checking on your payroll monies: simply log in to your IRS tax account to see whether the IRS got the payroll tax money. That’s right, the IRS makes your tax payments available to you online with its Electronic Federal Tax Payment System (EFTPS). You can log in to the EFTPS system and see whether the IRS has your payroll money.
If you use an accountant or a payroll service for your payroll, you can see the payroll payments at the EFTPS site. This is one sure way to know that the payroll taxes have been paid to the government.
Rule 1. Make sure that your tax money is going to the United States Treasury as it is supposed to. You can make sure this is happening by spending just a few minutes to check in with the IRS. Simply log in to the Electronic Federal Tax Payment System (EFTPS). Add a reminder to your appointment calendar to do this periodically—say, monthly.
Rule 2. Follow Rule 1.
Are you stressed out by payroll each month? Speak to a Client Advisor today about payroll solutions from Hinrichs+Pesavento. You can chat with us anytime on our homepage. Running your dental practice doesn’t have to weigh you down. Let us help!