Magazine article The CPA Journal

Contractors and Trust Fund Problems

Magazine article The CPA Journal

Contractors and Trust Fund Problems

Article excerpt

One of the most difficult problems a contractor may face in this difficult economy is dealing with penalties relating to failure to collect and pay taxes. While I discuss solutions for avoiding federal penalties, because state laws often conform with the federal system of income taxation, it is equally applicable.

Generally, the penalties under Sec. 6651(a)(2)--failure to timely pay taxes and Sec. 6656(a)--failure to make timely deposits of taxes due, are very difficult to have abated. In addition, officers and "responsible" persons can be held 100% liable for penalties on trust funds which include federal withholding taxes, FICA withholding taxes, state and city withholding taxes, and state sales taxes.

A contractor may find that disputes over job performance arise when the customer withholds portions or entire amounts of payment. In addition, with the high rate of bankruptcies, contractors may find themselves with uncollectible accounts receivable. Other clients may take longer than usual to pay.

The contractor then may face the problem of having to choose between paying the tax liability or paying suppliers. The contractor may be forced out of business if he or she doesn't pay employees or major suppliers. In such circumstances, there may be no choice.

Under the above circumstances, the contractor should contact the IRS and explain what has happened and try to enter into an installment payment agreement. The taxpayer should explain the steps being taken to start paying the trust fund tax liabilities. Examples of steps to make funds available are as follows:

* Reduce expenses such as officers' salaries and delay purchases of assets such as autos and trucks;

* Move to smaller offices to reduce rent;

* Reduce size of staff;

* Reorganize the financial/accounting area;

* Improve collections, if possible;

* Add outsiders to the Board of Directors;

* Negotiate with suppliers for longer credit terms; and

* Refinance bank obligations.

Next, the taxpayer should write the IRS Center Penalty Appeals Coordinator. The taxpayer should appeal for abatement of penalties under reasonable cause and undue hardship exceptions. To prove reasonable cause (Reg. 301-6651-1(c)(1)) and undue hardship (Reg. …

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