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Mark Sullivan has seen many
entrepreneurs trapped in a cycle of overwhelming tax bills - a cycle often started by
misuse of employees' withholding taxes.
That is the No. 1 tax problem for business - the money
they hold in trust for an employee, they end up spending," Sullivan says.
A former IRS revenue
officer, Sullivan, 32, is a principal at Sullivan Consulting (marks@sullivanconsulting.com), a tax controversy an audit service provider. He helps
businesses that have squandered employees' withholding taxes make peace with the IRS
Sullivan says that many
business owners, especially young entrepreneurs, don't realize how vital, and how painful,
this process of resolving a tax controversy can be.
"The problem right
now is that everyone thinks that the IRS is a kinder, gentler IRS and they don't have any
teeth," he says. "Well, they're coming back, and they're going hardcore."
A lot of the
younger business owners that I work with are between 25 and 32, and they don't know the
IRS from years ago. They think the IRS is no big deal. They don't have a healthy respect
for what could happen."
What can happen is that
penalties and fees added to the unpaid tax bill can leave business owners with a stunning
total owed.
"They get behind in
withholding taxes and they say, 'Oh, I'll make it up next month," Sullivan says.
"Then one month turns into another month and another month, and suddenly it starts to
snowball. It can easily get to be three quarters' or a year's worth of taxes, and the
penalties are huge."
So the business owner
puts off filing quarterly employment tax returns to avoid the bill, thus making that bill
ever larger.
"If you owe $10,000
on that return, and you wait five months to file, right there you get a 25 percent penalty
for not filing you return," Sullivan says. "That's $2,500 right there. Throw on
9 percent interest and a failure to deposit penalty, and that adds up.
"I know loan sharks
in New York who charge less interest than the IRS. The penalties mount up fast, and that's
usually what gets people in trouble."
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The outstanding taxes
can mean trouble for anyone that the IRS deems to be a responsible and willful officer of
the negligent company.
"The IRS
has provisions in place where they can go after all the owners and officers of the company
to collect that tax, and there are also criminal penalties that are now starting to be
enforced," Sullivan says. "The IRS is going to assess every officer in that
company to collect the money they didn't pay for the employees' withholding tax.
"if they find a signature
card for the bank in your name - boom, they're going to make you responsible. If your wife
has a job at another company, but her name is on this company tax return, they're going to
assess her."
To avoid these
scenarios, Sullivan suggests that business owners make withholding taxes a firm part of
their budget and then strictly stick to that budget.
"Business owners
look at how much cash came in and how many bills they have sitting right in front of
them," he says. "In order to budget taxes, you have to figure in variables that
aren't sitting right in front of you.
"The IRS doesn't
send you a bill. You have to know what you owe, and you have to come up with that chunk of
change - 7.5 percent of your total payroll."
If money is tight and
you're faced with the decision to pay either the IRS or other creditors, Sullivan
recommends you choose the IRS.
"Creditors are
willing to negotiate," he says. "And if you're a month behind in the Office Max
bill, what's the worse the can do? They're going to send you a late bill, and then they'll
cut off your credit.
"It might be a
little embarrassing that you can't buy stuff with your credit card at Office Max, but if
the IRS files a tax lien against you, your credit is going to be trashed for seven
years."
This can be especially
damaging for companies headed for the public market.
"I've seen what a
federal tax case will do to a company when you're trying to do an IPO," Sullivan
Says. "It's a big issue to an underwriter. You do your IPO, you get all this stock,
and guess who's sitting there first in line to get paid - the IRS. The underwriter doesn't
want to deal with that.
"Plus, you're
wasting an incredible amount of money by not paying those taxes. You're outdoing the
NASDAQ if you can get the return the IRS charges in penalties."
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