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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3747
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a company that is a sole proprietorship and I have not

Customer Question

I have a company that is a sole proprietorship and I have not paid our employer taxes from 2005 - 2012. I just filed them with a revenue officer and the liability added up to about $250,000 so I figured that it will double. I want to setup an installment agreement to pay them off but in the meantime I would like to switch the sole proprietorship to an SCorp because I have other individuals that are ready to be apart of the business. Right now the business has liquid assets of about $400,000 to cover the operations of the business and fixed assets of about $200,000.

How should I proceed with the SCorp. Can I turnover the assets to the new SCorp so they can continue with the business or will I have to take all my liquid assets to payoff my debt?

I forgot to mention that yes of course I have a personal federal liability of approximately $96,000 which I know will increase to at least $150,000 with penalties and interest.

Plus this is just the federal side. I will also have to pay the state taxes which I have not determined what it will be as of yet.

What can I do? Can I loan the money to the business and then have them pay it back to me over time or is it better to just invest it in the business?

What will the IRS accept.
Submitted: 10 months ago.
Category: Tax
Expert:  jgordosea replied 10 months ago.

Greetings,

 

Turning over the assets as a contribution to another business is likely to not be looked on favorably. From the IRS perspective using money that was withheld from employees rather than paying it timely to the government is akin to stealing that money. My experience would make me think that the IRS may take a hard stance on the unpaid employment taxes.

 

Although you do not mention (and perhaps should not as these posts are publicly visible) what your personal assets are the IRS may even take the position that you are able and so they will expect the full amount of the employment taxes due in short order.

Any use of the business funds other than paying the IRS debt in the most unfavorable extreme view could be suspected to be a willful attempt to avoid payment of the tax due.

 

From the Department of Justice Tax Manual at http://www.unclefed.com/SurviveIRS/Tax-Man/taxmanc08.pdf

describing Tax Evasion:

"The affirmative acts of evasion associated with evasion of payment cases almost always involve some form of concealment of the taxpayer's ability to pay the tax due and owing or the removal of assets from the reach of the IRS. Obstinately refusing to pay taxes due, possession of the funds needed to pay the taxes, and even the open assignment of income, without more, do not meet the requirement of the affirmative act necessary for an evasion charge.

Examples of affirmative acts of evasion of payment include: placing assets in the names of others; dealing in currency; causing receipts to be paid through and in the name of others; causing debts to be paid through and in the name of others; and paying creditors instead of the government."

 

Note that among the acts listed is placing assets in the names of others and paying creditors instead of the government. Please know that I am not saying that you are attempting to evade paying the tax but you need to be aware that some of the acts you mentioned, in some cases, are considered affirmative acts of evasion associated with evasion of payment.

 

You certainly can loan money to the business with loan documentation and payment back to you. with interest, in order to take care of the employment taxes due. Investing capital is also an option and that may be preferred if you do not wish to have income that is considered if you need to do financial statements personally to determine how much of an installment payment the federal or state government deems you can pay.

 

You should seriously consider retaining a representative (such as a tax attorney or enrolled agent) to assist in these matters before taking any action.

 

Please let me know if you want more information or discussion.

Thank you.

Customer: replied 10 months ago.

Have you received my response?

Customer: replied 10 months ago.
Relist: Other.
I responded to his answer to get clarification and he never answered me back.
Expert:  Lane replied 10 months ago.

I would have to agree with your previous expert.

His concerns are valid, and apply MORE for you than many other business owners for the following reason:

A sole proprietorship is considered a "disregarded entity" by the IRS... there is no separation between you and you business (income OR assets).

This is a personal tax issue on all fronts.

Further, if you transfer assets to a business entity such as an s-Corp or LLC (where there IS that corporate veil. that separation of owners' asset and the business' assets) it will be perceived as evasion.

Tax penalties for non-payment, for all kinds or reasons, mistake, procrastination, self-deception, relying detrimentally on bad advice are all treated as CIVIL penalties.

But when money is transferred to another party (whether that's an individual, a trust or a "corporate person") that is typically considered to have been done with INTENT. (What a criminal lawyer would call mens rae) .... and THAT is where you have crossed the line from civil action to CRIMINAL action.

There are lots of words for it ... intent, with knowledge, with purpose, willfully .. etc.

They all mean that this is now a crime. Tax Evasion is a crime. That's serious.

I would, as recommended above, sit down with a good tax attorney, lay it on the table and let him/her negotiate for you. Attorneys have a very good feel for when things will be perceived as being done with Intent (criminal) vs done without knowledge (a civil issue).

Transferring dollars to a separate entity?.... That one's a no-brainer.


Expert:  jgordosea replied 10 months ago.

Hello again,

 

Sorry there must have been a technical difficulty (and I was away).

Your reply never got into this thread only your question shows "Have you received my response?"

 

Please do let me know if you need more information or discussion.

Thank you.

 

Customer: replied 10 months ago.
I wanted to make sure I understand. Our weekly payroll is at least $25,000 and if I gave all the liquid assets to the IRS we would have to close. Then many times when bidding on jobs we need to use the cash to work a contract because we may get half of the payment up front and then have to use the company money to finish the job and then get paid on the back end. This allows us to be able to get many of the contracts that we do get. So would it be better to loan the money to the company and then get payments back to pay the IRS or Finally get an owner's salary to pay the monthly installment payments (I have been drawing $3,000 a month to pay my bills) I really want to find a happy medium so I can continue to build the business and pay back the government. I realize that the government looks at me as a thief but I just got caught up with trying to build the business. I also will have a tax liability with state so I want to be able to pay them back also.
Expert:  Lane replied 10 months ago.


Your best bet, again, is to have someone (preferably a tax attorney that handles these matters) represent you.

If you are not willing to do that, then I would NOT transfer money, as we've mentioned before, to another entity. This could be perceived by the IRA as your hiding the money (evading taxes).

Whatever you do, get something started with IRS first. BE PROACTIVE. If they will accept a payment plan, do that. THEN once you know the numbers, go from there.

Please look at this: http://www.irs.gov/Individuals/Payment-Plans,-Installment-Agreements
Expert:  PDtax replied 10 months ago.
Welcome to the site. I'm PDtax, and can add a few things to what the other Experts have offered. I hesitate to do that, but checked with one of the Experts, and he agreed my take was worth sharing.

What you have in mind requires some delicate restructuring, and under no circumstances should a non-professional operate directly with the IRS in matters like these. Do not take my advice. or that of the other Experts, and try to do this yourself. A tax pro, an Enrolled Agent, CPA or tax attorney specializing in tax controversy work is crucial.

The transfer of assets you suggest to an s corp, unless properly done, would be subject to IRS review/reversal, because the transfer could be considered a fraudulent conveyance. It is part of the solution that might work best for you, though.

Please confirm if IRS has filed tax liens against you and your business. That is crucial in determining how to proceed.

Also, please review your personal financial condition, including income and assets. These tax debts are personal, but what you have to pay to the IRS and state will be limited to what you have. And, any negotiations after you restructure must be done concurrently to provide that both agencies agree with and accept the terms of your plan, not the other way around.

The reason is I like the transfer of assets into a C corp, not an S, so the old tax debts stop under the taxpayer's social. I like to sell the assets to the new entity in exchange for a note, which allows me to limit my income from the new corp for installment and/or Offer purposes. I don't mind disclosing any of this to the Revenue Officer, and as you can tell I've done this before.

Once the transfer/sale is done, now the taxpayer has note income which is the basis for his agreements. It's also not wage income, subject to wage garnishment.

This is a technique I have done with full disclosure to the IRS, and it has always ok with them because one of their guidelines is that in order to make any deal, they have to make sure that no new debts will accrue (on that EIN). A new entity allows the Revenue Officer to work the case, and sets you up for continuity, since the new entity does not owe any of the old taxes). The existence of a tax lien complicates, but does not make this impossible.

Again, no offense meant to the other Experts, but this is work for an experienced hand. Hiring a tax pro is crucial, and if I send you off to meet one with a few things to suggest, I will have answered your questions, and then some.

If you want me to assist any further, please ask for me by name in any response. I'm PDtax.
Expert:  Lane replied 10 months ago.

I would like to reiterate that any recommendation to move assets to a C-Corp is even MORE dangerous than moving them to an S-Corp.

 

 

 

Fancy footwork by classic tax folks might sound appealing, but the law here says (especially with you having the history you have with this issue)... that moving assets to a COMPLETELY SEPARATE LEGAL ENTITY such as a C-Corp ...under both state corporate law AND federal tax law ... will be perceived as evasion.

 

 

 

IRS front lines won't buy it for a second ... and it you take it to tax court, the court will apply both (1) the substance over form doctrine AND (2) the reasonable person doctrine ... to say that ANY reasonable person would say that you moved the money to evade taxation.

 

 

 

WORK with them. They will not shut your business down, nor will they take your home ... IF you take the first step, work something out that says your best way to pay them back is to keep that business going, and approach them in a prepared way ... don't let them contact you next.

 

 

JUST TAKE A LOOK AT THIS: http://www.accounting-degree.org/scandals/ , TO GET A FEEL FOR HOW LARGE ACCOUNTING FIRMS HAVE HURT PEOPLE BY EITHER BECOMING A PARTY TO THE CRIME OR GIVING FALSE HOPE.

 

Lane

 

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