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Could You Be Hit with the Trust Fund Recovery Penalty?

If you own or manage a business with employees, you could be personally responsible for paying a harsh tax penalty. It’s called the Trust Fund Recovery Penalty (TFRP). It applies to the mishandling of Social Security and income taxes that must be withheld from employees’ wages.

These taxes are government property employers collect and hold in “trust” for the government until payment. If the funds aren’t properly handled, the IRS can impose a TFRP equal to 100% of the unpaid taxes on each responsible party. Consequently, the penalty amounts can be significant.

A Penalty with a Long Reach

The TFRP is among the more dangerous tax penalties not only because it’s large but also because it applies to many actions and people involved in a business, and historically, the IRS has aggressively enforced it. Here are some questions and answers to help avoid incurring the penalty:

What actions are penalized? The TFRP applies to willful failures to collect or truthfully account for and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who’s at risk? The IRS can impose the 100% penalty on anyone “responsible” for collecting and paying taxes. This includes corporate officers, directors, shareholders, partners and employees with such duties. Even voluntary board members of tax-exempt organizations may be liable under certain circumstances. Sometimes, responsibility has been extended to family members close to the business, attorneys and accountants.

How is responsibility determined? Responsibility depends on status, duty and authority. Anyone with the power to ensure taxes are paid can be held liable. Multiple people within a business can be deemed responsible, and each is at risk of a full penalty. If you know unpaid payroll taxes exist and have the authority to pay them but prioritize other payments instead, you could be deemed a responsible person.

While a taxpayer held liable may sue others for contribution, this must occur after paying the penalty in full. Such lawsuits are entirely separate from the IRS’s collection process.

Definition of “Willful”

Willful actions don’t require intent to evade taxes. The IRS defines “willfully” as knowingly prioritizing other expenses over withheld taxes. For example, bending to pressure to pay other bills instead of taxes is considered willful behavior.

Delegating actual tax responsibilities is no defense. Failing to deal with tax tasks can also be deemed willful.

“Borrowing” is Never an Option

Under pressure, it may be tempting to “borrow” from a tax withholding fund to pay an urgent expense. But don’t do it. The importance of paying all funds withheld from employee paychecks over to the government can’t be understated. Failure to pay can result in multiple people owing the hefty 100% TFRP, including people who didn’t realize they were considered responsible. Contact the office with any questions.

Next-Level Growth: Unlocking Your Business's Full Potential

After successfully navigating the start-up phase, your business has a strong foundation for growth. At the growth stage, business and financial advisory services become essential. Focus on these two key areas to elevate your company to the next level.

1. Financial and Tax Reporting

Businesses in the growth stage usually have more sophisticated financial reporting needs than start-ups. As a result, those that previously relied on cash or tax-basis accounting methods may need to graduate to accrual-basis methods and start following U.S. Generally Accepted Accounting Principles (GAAP).

Lenders and investors may require CPA-prepared financial statements, which include the following (listed in increasing level of assurance):

• Compilations,
• Reviews, and
• Audits.

Audited financial statements are the gold standard in financial reporting, required for companies regulated by the Securities and Exchange Commission (SEC). However, compiled or reviewed financial statements may suffice for many closely held businesses in the growth stage.

Audits involve a higher level of scrutiny to ensure financial statements are free from material misstatements and comply with GAAP. This process includes analytical testing, asset inspections, third-party verifications, and evaluations of internal controls, with auditors reporting any weaknesses.

Once a business is profitable, federal (and, in many cases, state) taxes typically apply to company income. If the business isn’t structured as a C corporation, the income passes through to owners and is taxed at the individual level.

Regular tax planning meetings with tax professionals are crucial to identify strategies for reducing tax liabilities and preparing for tax law changes. These meetings help optimize your tax position both now and in the future, helping to ensure your business stays financially sound.

2. Working Capital Management

Cash shortages are common for businesses during periods of growth. The main culprit is the “cash gap,” that is, the time between:

• When your business must pay suppliers and employees, and
• When it receives payment from customers.

For businesses that make or build products from scratch, the time to convert materials and labor into finished goods, sales and (finally) cash receipts can be significant.

A line of credit can alleviate seasonal or temporary cash crunches. Before approving credit applications, lenders typically request financial statements, tax returns and updated business plans. In addition, business owners in the growth phase typically must sign personal guarantees for business loans.

You also may need to apply other cash management techniques that target the following three components of working capital:

1. Receivables,
2. Inventory, and
3. Payables.

Professional advisors can assess your working capital metrics, benchmark performance against competitors, and recommend strategies to improve your business’s financial efficiency and competitiveness. These might include accelerating collections, optimizing inventory levels, maintaining safety stock, and negotiating better supplier terms.

Ask the Pros

Businesses need guidance from experienced professional advisors as they mature. Do-it-yourself accounting, tax and business planning can result in frustration and missed opportunities. If you haven’t done so already, it’s important to obtain the appropriate professional advice for your business.

It May Not Be Too Late to Reduce Your 2024 Taxes

If you’re preparing to file your 2024 federal income tax return and your tax bill is higher than you’d expected or your tax refund is smaller than you’d hoped, there might still be an opportunity to change it. If you qualify, you can make a deductible contribution to a traditional IRA until the filing date of April 15, 2025, and benefit from the tax savings on your 2024 return.

Who’s Eligible?

You can make a deductible contribution to a traditional IRA if:

• You (and your spouse if you’re married) aren’t an active participant in an employer-sponsored retirement plan or
• You (or your spouse) are an active participant in an employer plan, but your modified adjusted gross income (MAGI) doesn’t exceed certain levels that vary by filing status.

For 2024, if you’re married, filing jointly and covered by an employer plan, your deductible IRA contribution phases out over $123,000 to $143,000 of MAGI. For single filers or those filing as head of household, this phaseout range is $77,000 to $87,000. It’s only $0 to $10,000 if you’re married and filing separately. If you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with MAGI between $230,000 and $240,000.

Deductible IRA contributions reduce your current tax liability, and earnings within the IRA are tax-deferred. However, every dollar you take out will be taxed in full (and subject to a 10% penalty before age 59½, unless an exception applies).

Roth IRA holders may also contribute to their accounts until April 15, though these contributions aren’t tax deductible, and some income-based limits apply. Withdrawals from a Roth IRA are tax-free if the account has been open for at least five years and you’re 59½ or older. Certain withdrawals are tax-free before age 59½ or within the first five years.

How Much Can You Contribute?

If eligible, an individual can make a deductible traditional IRA contribution of up to $7,000 for 2024. The contribution limit is $8,000 for those age 50 and up by December 31, 2024. If you’re a small business owner, you can establish and contribute to a Simplified Employee Pension (SEP) plan up until the due date for your return, including extensions. For 2024, the maximum SEP contribution is $69,000.

Contact the office for more information about IRAs or SEPs, as well as additional strategies to reduce your 2024 taxes. During your tax preparation appointment, you can also ask how to save the maximum tax-advantaged amount for retirement.

File Your FBAR on Time to Avoid Penalties

Any U.S. person with a financial interest in or authority over foreign financial accounts may be required to file a Report of Foreign Bank and Financial Accounts (FBAR). An FBAR is required if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. FBARs are due April 15 of the following calendar year, though an automatic extension is allowed.

For purposes of FBAR requirements, here are the definitions of some key terms:

U.S. person. This includes U.S. individuals (adults or children), resident aliens, and specific entities, such as corporations, partnerships, trusts and limited liability companies.

Foreign financial account. An account is considered foreign if maintained in a bank outside the United States, even if the institution is a U.S. bank.

Financial interest. A U.S. person has a financial interest in a foreign financial account if he, she or it is the owner of record or holder of legal title, even if the account is for the benefit of another person. Financial interest may also exist if the owner of record or holder of legal title is one of several entities controlled by or on behalf of a U.S. person.

The FBAR rules can be complex, and penalties for noncompliance can be significant. Contact us with questions.

Options for Paying Your Tax Bill

If you owe federal tax, you can typically use credit and debit cards to pay directly or through certain third-party apps. However, the number of cards you can use when submitting individual tax forms is generally limited to two per year or two per month (for details: Frequency limit table by type of tax payment | Internal Revenue Service ).

Also, there are processing fees involved. The cost of using a personal debit card is $2.15. It’s 1.75% of the total ($2.50 minimum) if you use a personal credit card. Commercial debit or credit cards are charged 2.89% ($2.50 minimum). And, you’ll likely incur interest if you carry a credit card balance. Note: Employers can’t use credit or debit cards to pay federal tax deposits.

Stay Ahead of Business Cybercrime

Business owners, beware. Identity theft is a growing threat that can cripple your business or shut it down forever. Signs of business identity theft include the inability to file a tax return because a return has already been filed using the business ID number, a request for a routine extension is rejected, and tax transcripts obtained by the business don’t match its tax returns.

To help stay ahead of this cybercrime, install anti-malware and anti-virus software and employ firewalls. Use multi-factor authentication, encrypt and backup sensitive files, and limit personnel with access to these files. Contact the office with questions, or click here for more information: Identity theft information for businesses | Internal Revenue Service

Managing Products and Services in QuickBooks Online

Customers may be the lifeblood of your business, but they wouldn’t exist without the products and services you sell. It doesn’t matter whether you’re a mineral specimen dealer who does one-off sales, a reseller who sells items you make or buy wholesale in large lots, or a provider of services. You must always know what you have available to offer buyers.

QuickBooks Online can keep you in the know, and it can manage the forms and transactions you need to do business with your buying audience. If you were doing your accounting and customer management manually, you might be using index cards, large wall calendars and file folders stuffed with product lists and schedules. You’d spend a lot of time digging through item drawers and closets, counting your inventory by hand, and shuffling paper invoices, sales receipts and payment documentation.

Instead, what if all of this were automated, saving time, reducing errors, and increasing your chances of success? Here’s a quick look at some of the basics.

Are You Ready?

To be ready to sell, QuickBooks must be set up to handle any inventory you might have. Click the gear icon in the upper right corner and then click Account and settings under Your Company. Click Sales in the toolbar and scroll down to Products and services. Make sure the first, fourth, and fifth options are turned on, as pictured below. (The other two are optional.) If they’re not, click the pencil icon in the upper right corner and change them. Be sure to click Save when you’re finished, then Done in the lower right corner.

Have you created your product and service records? You can do this on the fly as you’re entering transactions, but it’s much better to do it ahead of time. That way, too, you’re not as likely to skip the details, which will be important later on when you’re running reports, for example. We’ve gone over the steps before. Click New in the upper left corner, then Add product/service under Other. A vertical panel slides out from the right, and you simply select from options and enter data.

Warning: Be precise when you’re dealing with inventory information. If you haven’t gone through this process before, it might be worth scheduling a session to go over this important step.

Using Your Records in Transactions

Let’s go through the process of entering a sales receipt. Click New in the upper left corner, and then Sales receipt under Customers. Choose a Customer from the drop-down list and complete any other fields necessary in the upper section of the form. Select the Service Date in the first column by clicking the calendar, then select the Product/Service in the next column (or click + Add new). The Description should fill in automatically.

The QTY (quantity) defaults to 1. If you mouse over or click in that field, a small window will pop up containing numbers for Qty. on hand and Reorder point, as pictured above.

Tip: If you know that you have more in stock than what is showing, you can cancel out of the transaction, find the item record in the list on the Products & services page, and click Edit at the end of the row. You’ll be able to adjust the quantity or the starting value. Be careful with this. Please contact the office if you’re not confident about how to handle it.

Enter any additional items and/or services needed and save the transaction.

The Products and Services Page

QuickBooks Online offers numerous reports related to products and services and inventory tracking (you’ll find them under Reports | Sales and customers), but you can learn a lot from the Product and Service page (Sales | Products and Services). At the top of the screen (where you can’t miss them) are two colored circles containing the number of items that are Low Stock or Out of Stock.

Click on either of these, and the list below will change to display only these items. You can get a lot of information about your products and services on this page, including Sales Price and Cost, Qty On Hand, and Reorder Point. You can also create new records or import databases of records in CSV, Excel, and Google Sheet formats.

Need Assistance?

Your business depends on accurate, real-time information about your inventory, and QuickBooks Online can supply it. This element of the site, though, requires precision and regular upkeep. If you’re struggling with it, contact the office for help troubleshooting one-time problems or to take a more active role in your accounting.

Upcoming Tax Due Dates

March 17

Individuals: Report February tip income of $20 or more to employers (Form 4070).

Employers: Deposit nonpayroll withheld income tax for February if the monthly deposit rule applies.

Deposit Social Security, Medicare and withheld income taxes for February if the monthly deposit rule applies.

Calendar-year partnerships: File a 2024 income tax return (Form 1065 or Form 1065-B) and provide each partner with a copy of Schedule K1 (Form 1065) or a substitute Schedule K1 — or request an automatic six-month extension (Form 7004).

Calendar-year S corporations: File a 2024 income tax return (Form 1120-S) and provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1 — or file for an automatic six-month extension (Form 7004). Pay any tax due.

April 1

Employers: Electronically file 2024 Form 1097, Form 1098, Form 1099 (other than those with an earlier deadline) and Form W-2G.

April 10

Individuals: Report March tip income of $20 or more to employers (Form 4070).

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