Step-daughter troubles with IRS

[Buckeye]

My SD (42 y/o) called yesterday asking advice because she, and the other members of the board of a local neighborhood swim club outside Cincinnati, are being sued (does the IRS sue people?) for back payroll taxes. Seems it all adds up to about $15,000 when the taxes, penalties and interest are added up.

I will relate what she told me on the phone but I have no first-hand knowledge and some of it sounds quite amazing.

Seems that payroll taxes were underpaid for the years 2005-2011. The IRS has settled a couple of the years (2007 & 2011 is the rumor) with one of the members and she has been removed from the suit. The word is her husband is a hunting buddy of the IRS agent who is handling the case and she and the agent went to school together. It also seems she settled and got out of trouble prior to the other folks even being notified what was going on.

The IRS has put a lien on the property and frozen all the bank accounts. The swim club is usually open Memorial Day to Labor Day but will be unable to open with all their bank accounts frozen. SD called the Cincinnati Taxpayer Advocate who was surprised the club was not being allowed to set up a payment plan and continue to operate to pay what they owe. IRS agent is playing hardball all the way. Is this normal? This doesn't seem like a huge amount of money given how many years we are talking about and that penalties and fee are at least half of the $15,000.

I recommended, at a minimum, to get everyone together to try and make a plan. Sounds like a tax lawyer would be a good idea but the one that is known to the family charges $250 and hour and wants a $5,000 retainer. SD and her husband can't do that on their own but maybe the group can do it together. The IRS wants her to come into the office and sign something that accepts everything they are saying but I recommended against signing anything without a lawyer.

I told her to check whether the club/board of directors has an errors and omissions policy or a liability policy that might cover their defence.

Would her own liability policy connected to her homeowners insurance help her defend herself?

 

[kramer]

Just a quick note, an Enrolled Agent (EA) can represent someone before the IRS. This is a designation one gets by passing a series of tests the IRS gives. Oftentimes, Enrolled Agents are also CPAs but there are many regular accountants with the EA designation. You can get a list of the local EA's via google, including their phone numbers, etc.

This might be cheaper than that $250/hour guy. My dad was an EA and wouldn't have charged anywhere near that. This seems more of an accountant issue rather than a tax lawyer issue. The lawyer-ly part seems more about who is liable, but I doubt that issue is complicated here.

Also, EA's are the guys who have experience negotiating settlements with the IRS. My dad did this all the time and he was not a CPA, either, just a guy with decades of tax and accounting experience.

 

[pb4uski]

Another thing to know is whether the back taxes are withholding taxes or not. The IRS is very strict when it comes to non-remittance of withholding taxes because it is essentially stealing money from your employees since you withhold it from their gross pay and neglect to remit it to the government.

From what you describe, it sounds like something that should be able to be worked out, but they should get professional help. The $250/hr tax lawyer seems like overkill, I would think a local EA or CPA who regularly deals with the IRS should be able to help them resolve the issue.

 

[MooreBonds]

I don't have any first-hand experience with IRS issues, so can't offer any suggestions about the timelines you're experiencing (but it does seem drastic and quick to freeze bank accounts if this issue was just formally brought to light - has it just been a matter of weeks since your SD received the notice?)

Also, while it might be opening up a can of worms, I would NOT be afraid to ask about the 2007 and 2011 years issues. If there was some 'buddy favor' issued by an IRS agent that was not evenly applied to the other years and other trustees of the Swim Club, I'd sound the alarm and demand equal treatment, especially since it was done before the official notices were issued.

 

[ratto]

It also seems she settled and got out of trouble prior to the other folks even being notified what was going on.

The IRS has put a lien on the property and frozen all the bank accounts.

This sounds too dramatic, considering other members haven't been notified by IRS about what was going to happen if they don't comply.

The IRS wants her to come into the office and sign something that accepts everything they are saying but I recommended against signing anything without a lawyer.

Do not sign any legal settlement with IRS solely based on what they're saying. Your SD definitely doesn't want to deal with any possible ramification 30 years later.

Would her own liability policy connected to her homeowners insurance help her defend herself?

Not sure if this is a good idea. I have a hunch that probably it's not.

If indeed there were erroneous payroll taxes, probably it's a good idea to pay all full amount, interest, penalties and be done with it asap. OTOH, if they're absolutely sure that there's any mistake or inaccurate settlement terms from IRS, your SD and other members can file case against IRS in the US federal tax court. In that case, it's not a matter of money, it's a matter of principle.

 

[kcowan]

This sounds suspicious, because I can't see the IRS negotiating/settling with one member for less than the total amount.

 

[easysurfer]

I can't say for sure, but it is tax scam season. I hear commercials about it all the time that start out "If you are being sued by the IRS..."

I got this answering machine message the other day, going something like "I'm calling about your utitlity bill which is past due.." Of course I knew it was a scam as my bill are set up for auto payment.

Some places, they pretend to be collectors, but really try to phone phish for personal info.

 

[frayne]

Just a quick note, an Enrolled Agent (EA) can represent someone before the IRS. This is a designation one gets by passing a series of tests the IRS gives. Oftentimes, Enrolled Agents are also CPAs but there are many regular accountants with the EA designation. You can get a list of the local EA's via google, including their phone numbers, etc.

This might be cheaper than that $250/hour guy. My dad was an EA and wouldn't have charged anywhere near that. This seems more of an accountant issue rather than a tax lawyer issue. The lawyer-ly part seems more about who is liable, but I doubt that issue is complicated here.

Also, EA's are the guys who have experience negotiating settlements with the IRS. My dad did this all the time and he was not a CPA, either, just a guy with decades of tax and accounting experience.

Ditto, get an EA to represent the group. Also the story sounds just a bit out of whack, so an EA who can objectively get and understand all the facts would be a big plus.

 

[pfleming]

As an EA, I agree. Get an EA. The National Association of Enrolled Agents will direct you to the local chapter. If this is trust fund penalties - not paying to the IRS what was withheld from employee paychecks - it is 100% of the underpayment and there is generally no corporate shield. Responsible individuals (using the IRS definition of responsible individual) are personally subject to the penalty. The garnishments and levies could extend to personal accounts if not rectified.

Get an EA who specializes in payroll issues and be warned, the IRS is running 18-24 months on resolutions.

 

[youbet]

Buckeye.....

There's an important item missing from your description of the situation (as you heard it from your SD). Does you SD know or feel that the payroll taxes were appropriately sent to the IRS? Does she know or feel that the payroll taxes were not sent to the IRS? Or does she just not know?

If the payroll taxes were sent in full, the records need to be gathered.

If the payroll taxes were not sent in full, an EA or tax attorney needs to be hired to negotiate a settlement and the settlement needs to be paid asap.

If she just doesn't know, and she's currently in a responsible position as a board member, she needs to work out a plan to find out.

I'm guessing that the actions currently being taken by the IRS are a result of inadequate response by the swim club to IRS communication. For example, just guessing here but......, it seems if the IRS had contacted the swim club and notified them they had under-submitted payroll taxes and the swim club had either sent evidence that they had actually sent the appropriate amount or, if they were negligent, they sent the amount plus penalties, none of this would be happening.

SD needs to get to the bottom of whether the funds were sent and the IRS is in error or how and when they will send the funds if they are negligent.

These kind of issues are ugly at best. Good luck to all involved in getting to the bottom of what happened and getting it resolved.

 

[Buckeye]

Another thing to know is whether the back taxes are withholding taxes or not. The IRS is very strict when it comes to non-remittance of withholding taxes because it is essentially stealing money from your employees since you withhold it from their gross pay and neglect to remit it to the government.

From what you describe, it sounds like something that should be able to be worked out, but they should get professional help. The $250/hr tax lawyer seems like overkill, I would think a local EA or CPA who regularly deals with the IRS should be able to help them resolve the issue.

Yes, it is related to payroll tax withholding.

 

[Buckeye]

Buckeye.....

There's an important item missing from your description of the situation (as you heard it from your SD). Does you SD know or feel that the payroll taxes were appropriately sent to the IRS? Does she know or feel that the payroll taxes were not sent to the IRS? Or does she just not know?

If the payroll taxes were sent in full, the records need to be gathered.

If the payroll taxes were not sent in full, an EA or tax attorney needs to be hired to negotiate a settlement and the settlement needs to be paid asap.

If she just doesn't know, and she's currently in a responsible position as a board member, she needs to work out a plan to find out.

I'm guessing that the actions currently being taken by the IRS are a result of inadequate response by the swim club to IRS communication. For example, just guessing here but......, it seems if the IRS had contacted the swim club and notified them they had under-submitted payroll taxes and the swim club had either sent evidence that they had actually sent the appropriate amount or, if they were negligent, they sent the amount plus penalties, none of this would be happening.

SD needs to get to the bottom of whether the funds were sent and the IRS is in error or how and when they will send the funds if they are negligent.

These kind of issues are ugly at best. Good luck to all involved in getting to the bottom of what happened and getting it resolved.

I need to find out who was initially contacted and what they did or didn't do. The club closes down in Sept and folks on the Board don't talk to each other for months. Obviously, my SD was not the first person contacted and someone ignored requests for info.

It didn't sound like SD knew for sure what had and had not been sent to the IRS when it was supposed to be sent. It sounds like a little bit of keystone cops. "She was supposed to take of that. No, that was his job." These are all educated adults who know better than to f- with the IRS. I'll try to get more details.

I will pass along the recommendation for an EA that specializes in payroll issues.

Ultimately, the club could be sold in a day. It sits on a beautiful piece of real estate that many people have wanted to purchase over the years.

 

[pfleming]

Ultimately, the club could be sold in a day. It sits on a beautiful piece of real estate that many people have wanted to purchase over the years.

This will not settle the IRS issue. As I stated above, Trust Fund Penalties will follow each person involved. The only way sold in a day will solve this is if they take that money and pay the IRS. Of course there could be or will be a lien on the property before long. The IRS will want the original payroll taxes due, whether and how much the penalties are depends on the ability of the expert they hire. $200/hr can be pretty cheap compared to penalties in the neighborhood of $7,500.00.

 

[FreeAtLast]

Seems that payroll taxes were underpaid for the years 2005-2011.

My guess is that the swim club has been receiving notices from the IRS possibly for years some or all of which have been ignored. There is probably much more to the story. It seems like the IRS is pretty far along with the case and now taking action for reasons of non compliance.

It is the responsibility of a business to report and deposit funds withheld from a paycheck just as it has to distribute the paychecks to the employees.

 

[Buckeye]

This will not settle the IRS issue. As I stated above, Trust Fund Penalties will follow each person involved. The only way sold in a day will solve this is if they take that money and pay the IRS. Of course there could be or will be a lien on the property before long. The IRS will want the original payroll taxes due, whether and how much the penalties are depends on the ability of the expert they hire. $200/hr can be pretty cheap compared to penalties in the neighborhood of $7,500.00.

There is already a lien on the property which would ensure they IRS was paid.

 

[Texas Proud]

It seems you have been given a lot of good advice on here...

But to answer a few possible reponses from other....

The IRS probably did not send notices for years... when it comes to withholding taxes they act very quickly when they find out.... they probably looked into it and determined that it went back to 2007....

As pointed out, it is better to pay someone that KNOWS what to do a few thousand to make sure it is done properly.... they also might be able to get some of the penalty removed....



But I will ask.. who was getting paid Our neighborhood swim team is run by volunteers... nobody gets paid...

If there were actual employees, then who did the payroll They would have withheld money from the paycheck and should have deposited it. If it were not deposited it would have shown up in the financials... did someone even do financials

Who was the treasurer They are the person who should be making sure all financial transactions are being taken care of.... this should not be a surprise to any board member if the job was being done.... even an incompetent treasurer should have known about this....


To others... take this as a warning about accepting a board position on a charity.... there are liabilities that come with the 'job'....

 

[Buckeye]

It seems you have been given a lot of good advice on here...

But to answer a few possible reponses from other....

The IRS probably did not send notices for years... when it comes to withholding taxes they act very quickly when they find out.... they probably looked into it and determined that it went back to 2007....

As pointed out, it is better to pay someone that KNOWS what to do a few thousand to make sure it is done properly.... they also might be able to get some of the penalty removed....



But I will ask.. who was getting paid Our neighborhood swim team is run by volunteers... nobody gets paid...

If there were actual employees, then who did the payroll They would have withheld money from the paycheck and should have deposited it. If it were not deposited it would have shown up in the financials... did someone even do financials

Who was the treasurer They are the person who should be making sure all financial transactions are being taken care of.... this should not be a surprise to any board member if the job was being done.... even an incompetent treasurer should have known about this....


To others... take this as a warning about accepting a board position on a charity.... there are liabilities that come with the 'job'....

The kids who do the lifeguarding are paid. The kids may also get paid if they man the snack bar. Wonder if the sales taxes were submitted?

Yes, the whole thing is total sloppiness. Who the heck was checking on things for heaven's sake!

Apparently, a lady named Beth started doing the taxes in 2007 and has been contacted as far back as 2 years ago. SD stopped managing the club in 2008 but her name is still on as a board member. SD said she doesn't know if it was oversight or theft.

 

[Texas Proud]

The kids who do the lifeguarding are paid. The kids may also get paid if they man the snack bar. Wonder if the sales taxes were submitted?

Yes, the whole thing is total sloppiness. Who the heck was checking on things for heaven's sake!

Apparently, a lady named Beth started doing the taxes in 2007 and has been contacted as far back as 2 years ago. SD stopped managing the club in 2008 but her name is still on as a board member. SD said she doesn't know if it was oversight or theft.

OK, that makes sense... in our neighborhood that is the neighborhood association that pays for the lifeguards, not the swim club. But, the one you mention might not be associated with a neighborhood.

Who knows if they are even charging sales tax... I know that the sales at the swim meets where my daughter goes does not... everything is 50 cents, $1 or $2...

If your daughter can show she has not been associated with the club since 2008 she can be let off the hook... except for the 2007 and 2008 amounts...

What about prior to 2007 Were the taxes paid?

How does the swim club get money? There must be some income if you are paying lifeguards. Can there be a short term increase in fees?

 

[Buckeye]

OK, that makes sense... in our neighborhood that is the neighborhood association that pays for the lifeguards, not the swim club. But, the one you mention might not be associated with a neighborhood.

Who knows if they are even charging sales tax... I know that the sales at the swim meets where my daughter goes does not... everything is 50 cents, $1 or $2...

If your daughter can show she has not been associated with the club since 2008 she can be let off the hook... except for the 2007 and 2008 amounts...

What about prior to 2007 Were the taxes paid?

How does the swim club get money? There must be some income if you are paying lifeguards. Can there be a short term increase in fees?

Sales tax is paid by the club and been confirmed to have been paid.

Beth was the one who was allowed to "settle" for two of the years and is no longer being pursued by the IRS. Apparently, the IRS contact has been going on for 2 years. No wonder they are pissed. But why did they let Beth to negotiate and settle separate from the others? Because she and her husband know the IRS agent?

There are yearly dues to join the club. The problem is opening the pool and running the swim club with a pool and restrooms and lights when the bank accounts have been seized/frozen. I don't think they are going to get many people/families paying annual swim club dues when there is no pool!

SD googled "her county, EA, and payroll taxes" and got a couple of hits.

Sounds like the IRS is taking as hard a line as is possible and because she is on the board she is liable. Lots of hearsay....SD said one of the folks involved told her the IRS agent said he knows he can squeeze some blood out of the turnips, i.e. the board members. Sounds like this guy is out for blood and is going to make it very hard on everyone just because he can.

 

[pb4uski]

I don't see where SD simply being on the board translates to personal liability for the swim club's malfeasances absent gross negligence. She should consult with a lawyer, but I would be cooperative and try to cause the swim club to be cooperative but consistently insist that it is the swim club's issue and no personal liability exists.

Worst case the swim club can declare bankruptcy.

 

[pfleming]

I don't see where SD simply being on the board translates to personal liability for the swim club's malfeasances absent gross negligence. She should consult with a lawyer, but I would be cooperative and try to cause the swim club to be cooperative but consistently insist that it is the swim club's issue and no personal liability exists.

Worst case the swim club can declare bankruptcy.

Trust Fund Penalties are always personal liability. No corporate shield. The only way to not have personal liability is to not have had anything to do with payroll, but a director may have a hard time convincing IRS of this.

 

[pb4uski]

Trust Fund Penalties are always personal liability. No corporate shield. The only way to not have personal liability is to not have had anything to do with payroll, but a director may have a hard time convincing IRS of this.

Only if one is a "responsible person" and from what I understand it is unclear if SD is a "responsible person" or not. Let's agree to disagree.

 

[Buckeye]

Trust Fund Penalties are always personal liability. No corporate shield. The only way to not have personal liability is to not have had anything to do with payroll, but a director may have a hard time convincing IRS of this.

The IRS is definitely treating the situation as no corporate shield. I'm afraid I can see where SD would be considered a person of responsibility because she was a member of the BOD. A club member as responsible person, no. A board member, yes.

I guess the board members could show "due diligence" if they could pull out annual board meeting minutes where the "tax person" was asked, "Did you pay all the payroll taxes for the year?" and he/she responded "yes" and showed some report to show they paid the taxes. I doubt such backside covering minutes exist.

 

[pb4uski]

See below. Assuming that the payment of payroll taxes was not part of SD's responsibilities while she was with the organization and assuming that she was not aware that they didn't pay, she may not meet the criteria below. The agent will press it but she should seek counsel (and IMO resist any characterization that she was responsible).

From IRS website:

Who Can Be Responsible for the TFRP

The TFRP may be assessed against any person who:

is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

an officer or an employee of a corporation,
a member or employee of a partnership,
a corporate director or shareholder,
a member of a board of trustees of a nonprofit organization,
another person with authority and control over funds to direct their disbursement, or
another corporation or third party payer.

For willfulness to exist, the responsible person:

must have been, or should have been, aware of the outstanding taxes and
either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

You may be asked to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee's function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. Notice 784, Could You Be Personally Liable for Certain Unpaid Federal Taxes?, contains additional information regarding the TFRP.

 

[youbet]

There may be documentation which details the responsibilities of the Board.

In any case, the swim club has some assets, no? There were frozen bank accounts mentioned for example. We're not talking about zillions of dollars here. Find out what is owed. Pay it. If the swim club is lacking a small portion of what is owed and can't sell an asset or borrow the money, perhaps the amount when split among the several directors will be less than a legal battle with the IRS. Understand that and don't put pride before the fall. Remember, intentionally or not, the swim club and its BOD has done a big no-no and while it's fun to get indignent over how the IRS is handling it, the swim club is guilty. At least that's what I'm hearing.

If the swim club stuggles to operate after this, so be it. SD should find another way to serve the community where she isn't assuming responsibility and accountibility for a business where these types of issues could very well happen.

Look for the easy way out and get out.

My best wishes that this ends with a minimum of aggravation.