In reality a significant number of businesses fall behind on federal tax deposits and almost exponentially increase their liability of taxes, penalties and interest. Liabilities are sometimes found to be in the $Millions of Dollars$!!! Impact Tax Resolution is here to help alleviate the stress, pressure and anxiety that type of tax liability can cause.
If your corporate tax liability has gotten out of control and you are worried about protecting your assets but would like a new beginning, corporate restructure may be an appropriate strategy for you. Impact Tax Resolution understands that sometimes during the course of business your business may fall behind on your required deposits.
Understanding Corporate Restructure and the Payroll Tax
Understanding your payroll tax liability will give you a good base to understanding the benefits of using a corporate restructure strategy. In general your payroll tax liability is broken down in two categories. Non-trust fund components and trust fund components; basically employer and employee contributions, as the employer you are responsible to withhold and send the IRS both contributions.
The Non-trust fund components are the corporation’s matching contributions to Medicare and Social Security; In other words the employer’s share of FICA taxes.
The Trust Fund component consists of the portion of the employee’s paycheck that the employer is to hold “in trust” and give to the government on a regular basis. Simply the employee’s share of FICA taxes, along with income taxes that are to be withheld.
Suppose an assessment of the tax liability is done and the Non-Trust fund portion including penalties and interest is more than half of the outstanding liability of the existing corporation. What would happen if the company was to be shut down?
When a corporation is brought in to existence the entity is issued an EIN, known as an employer identification number. If the EIN with the substantial tax liability were to issue a final return and close the doors, 100% of the Employer’s Non-Trust fund tax liability along with 100% of the penalties and interest associated with that liability would be gone with the corporation.
Meaning the only portion the IRS may try to attach to a prior responsible person would be the Trust Fund Recovery Penalty. The end result may be a substantial tax saving. Great care must be taken when implementing this strategy to be sure the IRS does not pursue a new entity for the old corporation’s liabilities or the taxpayer is not found to be defrauding the IRS. It is always good to get IRS approval before moving forward.
For this strategy to be effective the “alter ego” designation must be avoided at all cost. If the IRS deems the new entity an “alter ego” then it has effectively transferred all the liabilities of the first entity that was shut down to the new entity that has been established, wiping out all advantages of using the corporate restructure strategy. The IRS states that an alter ego generally signifies a “second self’. The IRS uses this doctrine of law to effectively disregard an entity’s separate legal identity in order to extend liability to prevent abuse. The IRS looks for specific characteristics in order to extend liability via an “alter ego” designation. Impact Tax Resolution makes sure to consider the IRS guidelines when pursuing a corporate restructure for your business.
For this strategy to be effective the “nominee” designation should be avoided at all cost. If the IRS deems an asset transfer as a nominal transaction, they are going to try to prove that there is a fraudulent conveyance of property to avoid legal obligation. The IRS says a “nominee” is someone specified to act on behalf of another. In general an outside party may possess legal title to a property of the taxpayer while the taxpayer enjoys full use and benefit of said property as if it were still his or her possession. The IRS also has careful guidelines that need to be followed in order to avoid a “nominee” designation. Impact Tax Resolution is here to guide you safely through all aspects of the corporate restructure strategy.
Your business or practice may have assets. It is not uncommon for the IRS to require that those assets be valued using a computation known as quick sale value to be sure their interest in the tax liability is protected. Depending on the equity value in the business assets the IRS may require that value to be given to them in order for any Federal Tax Lien to be released. When planning to transfer assets to a new entity be sure to be aware of any existing tax liens and the process in order to get the lien released. The professionals at Impact Tax Resolution will walk with you every step of the way should a corporate restructure be the most appropriate course of action given your individual circumstances. Those decisions would be made in agreement only after careful review. When done correctly the tax savings can be substantial.
Administration / Cashflow
When implementing this strategy it is important to pay close attention to business administration. Your industry may have guidelines on issues such as insurances and licensing. We want to make sure the new EIN is compliant with your industry to receive income. It is very important your cashflow is not interrupted. Be sure to note all sources of revenue and business relationships in order to facilitate the transition to the new EIN. Impact Tax Resolution is ready to guide you though the process and help your business get a fresh start.