Taxation & Estate Planning

How do soaring restaurant costs translate into a IRS collection problem?

By howardlevy

This week, the New York Times reported that the cost of a 30-pound sack of rice has doubled, and a 15-pound bag of flour has almost tripled for restaurants.  An article yesterday in The Cincinnati Enquirer had pasta up 130 percent, eggs up 73 percent.  Flour is up 87 percent just in the first three months of 2008.

So, where do some restaurant operators turn in tough times?  Loans from the IRS.

Well, not real loans.  Loans in the sense that the restaurant operators often fund daily operations when short on cash by not paying their employee withholding taxes to the IRS.  Suppliers are at the door today, and employees need to be paid tomorrow, but the IRS requires only a quarterly accounting of whether the withholding taxes were paid.  There is a time lapse for the tax liability to make it through the IRS collection queue and rear its ugly head.  This can take as little as a few months to several years, depending on the severity of the problem.

Operating a business with an unwilling government partner has a tremendous downside.  It is a gamble: pay suppliers and employees now, and hope to recover to pay the IRS back before it becomes a problem. 

These “IRS loans” are expensive for the small business owner, of course, more expensive than typical bank financing.  The IRS will charge interest and penalties, which will cause the original amount owed to double in five years. 

The IRS does not kid around with this.  Business owners and managers who made the decision to use employee withholding taxes to pay suppliers will be pursued by the IRS for the taxes.  This is called a trust fund recovery penalty, meaning there was an implied “trust” between the IRS and the restaurant operator to keep and pay the employee’s taxes to the IRS, not suppliers.  The IRS routinely recovers trust fund taxes from the personal assets of small business owners (in addition to the business assets). The quickest recovery is a clean-out of bank accounts.

Trust fund cases can be defended and settled on the basis of either liability and collectibility, but being both personally and professionally ensnarled in an IRS tax controversy is a life experience best avoided.  

Full post as published by IRS and the Law on June 08, 2008 (boomark / email).