Patricia Gonzales

Tax Accounting I
December 4, 2013

TAX PROBLEM
A small construction business failed to remit federal and state payroll taxes and
prepare/file appropriate quarterly tax returns.
FACTS
The company experienced an imbalance in turnover in Accounts Receivable and
Accounts Payable, resulting in cash flow problems. Payments were coming in late and so there
was not enough capital to cover expenses on time. The owner has also been using the payroll
withheld taxes from employees as operating funds for the business instead of remitting it.
ISSUES
Some of the issues that I will be researching is how should the owner go about settling
their past due taxes? What are the possible penalties that the owner faces for failing to report and
file their payroll taxes?
RESEARCH
Upon my research, the suggested course of action that I would advise the client to take is:
1. Prepare all the 941 and/or 944 returns for the periods they havent paid and file it because
according to the Internal Revenue Service, all tax returns that are due must still be filed,
regardless of whether or not you can pay in full.
A 941 return is the Employers Quarterly Federal Tax Return, which are filed every three
months and states the amount of your employees federal income tax and FICA withheld for the
previous quarter.

Patricia Gonzales
Tax Accounting I
December 4, 2013

A 940 return is the Employers Annual Federal Unemployment Tax Return, which is
filed only once a year and reports the total quarterly payroll tax deposit. From that amount, the
federal unemployment tax is calculated. The business pays the FUTA tax and is not withheld
from its employees paychecks. (Small Business/Self-Employed: When IRS Trouble Comes).
2. Based on the returns prepared and filed, determine the back taxes due.
3. At the same, remit the taxes for the current period and submit the appropriate tax returns
to establish a cut-off for the past due taxes and preventing it to be on going.
For failure to make timely deposits, the client faces some possible penalties/consequences by the
IRS if not settled immediately such as:
1. According to Publication 15 section 12 from the Internal Revenue Service states that For
each whole or part month a return is not filed when required (disregarding any extensions
of the filing deadline), there is a failure-to-file penalty of 5% of the unpaid tax due with
that return. The maximum penalty is generally 25% of the tax due. Also, for each whole
or part month the tax is paid late (disregarding any extensions of the payment deadline),
there is a failure-to-pay penalty of 0.5% per month of the amount of tax. For individual
filers only, the failure-to-pay penalty is reduced from 0.5% per month to 0.25% per
month if an installment agreement is in effect. You must have filed your return on or
before the due date of the return to qualify for the reduced penalty. The maximum
amount of the failure-to-pay penalty is also 25% of the tax due. If both penalties apply in
any month, the failure-to-file penalty is reduced by the amount of the failure-to-pay
penalty. The penalties will not be charged if you have a reasonable cause for failing to

Patricia Gonzales
Tax Accounting I
December 4, 2013

file or pay. If you receive a penalty notice, you can provide an explanation of why you
believe reasonable cause exists. In addition to any penalties, interest accrues from the due
date of the tax on any unpaid balance. If income, social security, or Medicare taxes that
must be withheld are not withheld or are not paid, you may be personally liable for the
trust fund recovery penalty. (IRS, 2013).
2. The IRS could also audit the companys books, speak to employees and then hold its
owners and other employees such as the managers and bookkeepers personally liable for
the payroll taxes due.
Since the client owns a small business, he himself can be penalized for the businesss failure
to make the payroll tax deposits. The Trust Fund Recovery Penalty (TFRP) wouldnt apply to
the client because he does not own an incorporated business.
This reflects the section of Internal Revenue Code 6672: Any person required to collect,
truthfully account for, and pay over any tax imposed by this title who willfully fails to collect
such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner
to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties
provided by law, be liable for a penalty equal to the total amount of the tax evaded, or not
collected, or not accounted for and paid over. (Small Business/Self-Employed: When IRS
Trouble Comes). The internal Revenue Code Section 6672 is also known as 100% Payroll
Penalty.
3. The client could face consequences for the state in which he is living in as well; in this
case its the State of Delaware. Their rule states Whenever any employer fails to
collect, truthfully account for, pay over the tax, or make returns of the tax required, the

Patricia Gonzales
Tax Accounting I
December 4, 2013

Division of Revenue may serve a notice requiring that the taxes which become collectible
after service of such notice, to be deposited in a bank approved by the Director of
Revenue, in a separate account, in trust for and payable to the Department of Finance,
and to keep the amount of such tax in such account until paid over to the Department of
Finance. Such notice shall remain in effect until a notice of cancellation is served by the
Director of Revenue. (Section 7 - Withholding Tax Book).
CONCLUSION
I advise my client to have all documentation on the financial statement and forms filed
prepared and ready before reporting to the IRS. Then, set up a meeting with IRS to discuss and
or seek settlement/payments of the back taxes. Upon the meeting, if no arrangement has been
made, the client should await the response of IRS to their settlement request.

Patricia Gonzales
Tax Accounting I
December 4, 2013

BIBLIOGRAPHY
"Internal Revenue Manual - 4.23.9 Employment Tax Penalty and Fraud Procedures." Internal
Revenue Manual - 4.23.9 Employment Tax Penalty and Fraud Procedures. N.p., n.d. Web. 01
Dec. 2013. http://www.irs.gov/irm/part4/irm_04-023-009.html.
"Publication 15 (2013), (Circular E), Employer's Tax Guide." Publication 15 (2013), (Circular E),
Employer's Tax Guide. N.p., n.d. Web. 01 Dec. 2013.
http://www.irs.gov/publications/p15/ar02.html.
"Section 7 - Withholding Tax Book." Section 7 - Withholding Tax Book. N.p., n.d. Web. 01 Dec.
2013. http://revenue.delaware.gov/services/wit_folder/section7.shtml.
"Small Business/Self-Employed: When IRS Trouble Comes." - The Tax Law Offices of Fred Daily.
N.p., n.d. Web. 01 Dec. 2013. http://www.taxattorneydaily.com/topics/ch-11-small-businessself-employed.php.