Mistakes You Should Never Make

Sure you should get an accountant. But you should still reserve that much money.

Getting an accountant is your first major purchase as a new business owner.

And getting a good one is not all that easy. I lucked out, the one I ended up with (after trying two others) was a CFO of a large company that decided he had enough of the pressure and joined his wife's fledgling accounting company.

So instead of just having an accountant I ended up with a mentor to boot, all for the price of one.

I know this is a minor point of the article, but as someone with a degree from Harvard Extension I need to weigh in on that part of the story. I hate people who make this lie of ommission. Harvard Extension isn't Harvard College or Harvard Business School, but it still provides a very good education with great flexibility at an even better price. However, there is a small minority of people that continuely try to pass off their degree (or in this case a lack of degree, which is an even bigger crime considering that both the admission and graduate rates of the College and Extension School are roughly inverses of each other) as something more than it is. This isn't a fabricated credential on a resume; it is a lie that makes other people guilty by association. Everytime someone confesses or is caught doing this my degree becomes devalued. It establishes a repuation for HES students and alumni as unethical Harvard wannabees that are looking for any way to cut corners. The lesson to learn is not about managing your own reputation for ethics and honesty, but to also remember that you are a member of community. You don't only represent yourself. You represent yourself, your company, your friends, your family, your school, your industry, your hometown, your gender, your race, your sexual preference...

Obligatory [semi-]relevant xkcd: http://xkcd.com/385/

This was a very useful read, thank you!

Seth,

I really enjoyed reading your article. It was extremely insightful, and I hope to read more articles posted on your blog in the future.

The logic here appears to be that since the employee is deemed to have paid the government on the day that an employee receives his or her paycheck, the employer is holding those funds in a trust for the government, to be remitted quarterly. The government appears to believe in Monteiro's strategy: "Fuck you, pay me." So you -- as an officer, an employee who pays bills, possibly a board member, or possibly other related parties -- can be personally liable if, for example, you used money from that presumptive trust to pay any other bill.

   Although Internal Revenue Code Section 6672 includes officers, partners, and 
   employees, it does not exclude other individuals or firms that that can be 
   held liable.  The IRS will first try to recover payment from the responsible 
   persons with the most liquid assets, but will also concurrently hold as many 
   people as possible liable, each with joint and several liability for this 
   100% penalty.  There is no presumption of innocence in trust fund tax 
   situations. In Skouras v. United States, the court determined the assessment 
   on a responsible party is presumptively correct and issues relating to 
   willfulness could be resolved at the summary judgment level. The individual 
   has the burden of disproving by a preponderance of the evidence, the 
   existence of one or both of the elements that is willfulness or 
   responsibility. [1]

here [1] are some interesting horror stories:

   Aside from the persons normally thought of as being responsible for these 
   taxes (CEO, CFO, President, Secretary, Treasurer, partner), the courts have 
   given fairly wide latitude as to which entities or individuals the IRS can 
   assign responsibility to. In 1987, the United States Supreme Court held that 
   the third party liability for trust fund taxes was affirmed against a lender 
   who paid employees’ wages with the knowledge the firm did not intend or 
   would not be able to make timely deposits of the trust fund taxes. In 1985 
   the courts found that a lawyer, who had power of attorney from the owner to 
   operate a car dealership, was found liable for the 100% penalty. In another 
   case the IRS determined that workers were incorrectly classified as 
   independent contractors and assessed the 100% penalty to the principals of 
   the firm. In a 1984 Revenue Ruling, the IRS stated that a volunteer member 
   of a board of trustees for a charitable organization can be held liable for 
   the 6672 penalty. In 1978 the United States Ninth Circuit Court of Appeals 
   determined that a general contractor was responsible for the trust fund 
   taxes not remitted by a subcontractor. An accounting firm was held liable as 
   a responsible party because it had failed to remit a client’s trust fund 
   taxes and paid creditors other than the Internal Revenue Service. The IRS 
   deemed the friend of a business owner responsible because he paid some 
   utility bills for the company, extended loans or pledged collateral on loans 
   to the company.
   
   Imagine the shock when the IRS levied the Individual Retirement Account 
   (“IRA”) account of an officer of an S corporation and then included the 
   proceeds of the levied funds in the taxpayer’s Adjusted Gross Income for the 
   purpose of determining his earned income. The IRS used the constructive 
   receipt doctrine to conclude the amount levied from an IRA was a 
   disbursement – it had to be included as income. The taxpayer was further 
   refrained from deducting it as a pass through loss or a necessary business 
   expense. This is just a sampling of the many cases involving withholding tax 
   liability and the long arm reach of the IRS’ “responsible party” strategy. [1]

Like I said -- you can pretty fairly characterize this as, "Fuck you, pay me." Where I to own a business, I would strongly consider creating segregated accounts to hold the funds owed to the government. In fact, it would be nice if I could create a way to just pay the government every other week along with payroll so I would have no owed-to-the-government funds on hand to create temptation...

[1] http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2306636_code...