Author: Leon Clinton

If you have employees in your business, this story should have your attention.

Timothy McCloskey, president and sole shareholder of Brosius, delegated financial responsibility to Kathleen Lawson, his bookkeeper and chief financial officer. 

Ms. Lawson embezzled more than $800,000 from Brosius and failed to remit employee withholding taxes to the IRS for 19 quarters (4.75 years). Once Mr. McCloskey became aware of the magnitude of Ms. Lawson’s embezzlement, he knew that he could not continue to keep Brosius in business. 

He discussed bankruptcy with his lawyer, but circumstances dictated winding down the affairs of the corporation as a better alternative. Mr. McCloskey began paying off creditors, other than the IRS.

He sold company inventory for $240,000 and used this money to pay off a loan to National City Bank, because he had personally guaranteed this debt. 

Mr. McCloskey, as president of Brosius, signed and mailed Form 941 returns for the 19 back quarters and paid the taxes and penalties for three of those back quarters. The remaining assessments against Brosius (and soon, against Mr. McCloskey, individually) for penalties, statutory additions, accrued interest, and costs totaled $325,695. 

If you own and are active in the business, you are personally responsible for making sure that the payroll taxes are paid. Neither the IRS nor the law allows excuses.

See if you can answer the following question: Are you absolutely, positively sure that your payroll tax money has been remitted to the IRS? Have you seen absolute, physical proof with your own eyes?

• You can’t ask someone and count on that answer. 
• You can’t see a report from your payroll service and believe that as absolute proof. 
• The fact that the payroll tax amounts were taken from your business bank account does not mean that money was remitted to the IRS. 

What, then, is the answer?

It’s simple, really. Examine your account with the IRS. You can see your payroll tax money sitting in your IRS payment account by just looking at your account. 

Here’s how this works: First, it’s simple, sure, and free. You register with the IRS’s Electronic Federal Tax Payment System (EFTPS). Once registered, you can see physical proof of your tax payments in the IRS register. The register holds the last 15 or 16 months of your payments. 

The EFTPS register is absolute proof. If you see the deposits in the register, you know that your in-house bookkeeper or outside payroll service properly sent the money to the IRS. If the money is missing, the register tells you so. 

To check out and register for the EFTPS, click here to get to the EFTPS home page.

If you would like to discuss your payroll, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• September 1, 2021

Three bad things happen when you file your tax return late.

What’s Late?

You can extend your tax return and file during the period of extension; that’s not a late-filed return.

The late-filed return is filed after the last extension expired. That’s what causes the three bad things to happen.

Bad Thing 1

The IRS notices that you filed late or not at all.

Of course, the “I didn’t file at all” people receive the IRS’s “come on down and bring your tax records” letter. In general, the meeting with the IRS about non-filed tax returns does not go well.

For the late filers, the big problem is exposure to an IRS audit. Say you’re in the group that the IRS audits about 3 percent of the time, but you file your tax return late. Your chances of an IRS audit increase significantly, perhaps to 50 percent or higher.

Simply stated, bad thing 1 is this: file late and increase your odds of saying: “Hello, IRS examiner.”

Bad Thing 2

When you file late, you trigger the big 5 percent a month, not to exceed 25 percent of the tax-due penalty.

Here, the bad news is 5 percent a month. The good news (if you want to call it that) is this penalty maxes out at 25 percent.

Bad Thing 3

Of course, if you owe the “failure to file” penalty, you likely also owe the penalty for “failure to pay.” The failure-to-pay penalty equals 0.5 percent a month, not to exceed 25 percent of the tax due.

The penalty for failure to pay offsets the penalty for failure to file such that the 5 percent is the maximum penalty during the first five months when both penalties apply. 

But once those five months are over, the penalty for failure to pay continues to apply. Thus, you can owe 47.5 percent of the tax due by not filing and not paying (25 percent plus 0.5 percent for the additional 45 months it takes to get to the maximum failure-to-pay penalty of 25 percent).

Don’t let the three bad things happen to you. If you want to discuss any of the bad things, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 26, 2021

The $250,000 ($500,000, if married) home sale gain exclusion break is one of the great tax-saving opportunities.

Unmarried homeowners can potentially exclude gains up to $250,000, and married homeowners can potentially exclude up to $500,000. You as the seller need not complete any special tax form to take advantage. 

To take full advantage of the principal residence gain exclusion break, you must pass two tests: the ownership test and the use test.

• To pass the ownership test, you must have owned the home for at least two years out of the five-year period ending on the sale date.
• To pass the use test, you must have used the home as your principal residence for at least two years out of the five-year period ending on the sale date. 

Key point. These two tests are completely independent. In other words, periods of ownership and use need not overlap.

If you’re married and you and your spouse file your tax returns separately, you can potentially qualify for two separate $250,000 exclusions.

If you’re married and file jointly, you qualify for the $500,000 joint-filer exclusion if:

• either you or your spouse pass the ownership test for the property and 
• both you and your spouse pass the use test. 

When you file jointly, it’s possible for both you and your spouse to individually pass the ownership and use tests for two separate residences. In that case, you and your spouse would qualify for two separate $250,000 exclusions. 

Each spouse’s eligibility for the $250,000 exclusion is determined separately, as if you were unmarried. For this purpose, a spouse is considered to individually own a property for any period the property is actually owned by either spouse.

The other big qualification rule for the home sale gain exclusion privilege goes like this: the exclusion is generally available only when you have not excluded an earlier gain within the two-year period ending on the date of the later sale. In other words, you generally cannot recycle the gain exclusion privilege until two years have passed since you last used it. 

You can claim the larger $500,000 joint-filer exclusion only if neither you nor your spouse took advantage of it for an earlier sale within the two-year period. If one spouse claimed the exclusion within the two-year window, but the other spouse did not, the exclusion is limited to $250,000.

As you can see, there’s much to know about the home sale exclusion. If you would like to discuss how the exclusion would work for you, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• August 22, 2021