Charles Read, CPA, USTCP, IRSAC
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What is the hardest part of payroll tax compliance? I saw this question on Quora.com, so I thought I’d answer it here as well.
There are lots of parts to payroll tax compliance.
- Calculating the appropriate taxes.
- Depositing the taxes (Federal, State, and Local).
- Creating and filing the myriad of reports.
But the toughest part in my experience is dealing with mistakes made by the agencies involved.
You didn’t do anything wrong and now you have to prove it.
Let’s use the IRS as an example.
Taxing authorities make billions and billions of dollars of errors every year. Let’s use the IRS as an example but the States and Local authorities are not much different.
When your turn comes and the IRS makes an error what do you do? Or you made a simple error which did not rise to gross negligence, the IRS cannot penalize you for a simple error.
Your first letter protesting a penalty will be basically ignored. You will get a response saying they are not going to abate the penalty.
This is a form letter because no one really read your first letter.
You will get instructions on what to do if you disagree.
Your second letter to the appeals coordinator will probably be treated the same way. You will now be getting more and more threatening collection letters.
Next, depending on the time frame you will either go to an appeals hearing or a CDP (Collection Due Process) hearing. At this point, you may be able to solve it. Many times they will offer to settle for less than the full amount, but you, in fact, may not owe anything.
You cannot get them to understand what happened. What’s next?
Remember their job is to collect money not to abate penalties.
Now you have to file a petition with the US Tax Court. An attorney may want thousands of dollars to this even though the filing fee is only $60.00. You can actually file a petition on your own (Pro Se) for just the $60.00 or if you are indigent for free.
Most tax court filings (95%) are settled out of Court. The IRS does not like going to Court. You will actually at this point have some pretty sharp people looking at this and seeing if they want to explain to a Judge how they have treated you.
All of this to correct an error on their part or to get a ruling that you made a simple error and did not commit gross negligence.
That is the hardest part of tax compliance.
The easiest part is just to pay the penalty which is not a deductible tax expense.
Of course, this can all be avoided if you outsource your payroll to a reputable payroll company (hint, hint, like GetPayroll).