Business bankruptcy cases can lull you into inattention when no payroll tax issues are apparent on the face of the situation.
Even the client who doesn’t owe the IRS now can get bitten.
[You didn’t think this was simple, did you?]
Corporate officers are personally liable for monetary penalties if they fail to give employees their w-2 forms on time.
It’s easy to miss making provision for w-2’s if a business shuts down mid year. Yet the corporate officers don’t get a bye from this responsibility.
So, on my checklist of things to do in a business shutdown is make provision for issuing w-2’s.
Final tax return
If the business has once filed an employment tax return, then stops, the IRS doesn’t assume that the business has shut down and there is not payroll. No sir.
It assumes that things have continued just as they were and you’ve simply neglected to file the return. And neglected to pay over the trust fund withholding from employee salaries.
That assumption often leads to the assessment of the civil penalty against the individual officers for the payroll that never was.
Morale of this story: file an employment tax return that checks the box at the top of the form: final return.
The officer loan
For every business person who issues net checks to employees and shorts the IRS on payroll taxes, there’s the “savvy” sort who stays out of that trouble.
Rather than cutting himself a payroll check, he makes himself a “loan” from the business. There’s no withholding triggered by a loan, after all, so there’s no tax to the business. A loan isn’t income to the borrower, so there’s no tax on the individual.
Well, perhaps not so smart. If the business ends up in bankruptcy, voluntary or involuntary, the bankruptcy trustee sees a plump asset in that money owed to the business by its shareholder!
It’s not a comfortable position to be in, representing the shareholder, if you have to argue “that wasn’t really a loan, he was just evading taxes”. Yuk! (that’s a legal term, isn’t it?).
If the business forgives the loan, there’s the issue of forgiveness of debt income.
Add to your client interview a question about loans in lieu of payroll. Whether the debtor is the business or the shareholder, you need to know.
Three more tax issues to add to your quiver.
Image courtesy of U.S.Marine Corp and Wikimedia.