A small business client – a small charity – had an open wage tax penalty issue when I started working with them three years ago. I looked into it, got the amount decreased by a little bit and advised them to pay it ASAP. Then over the next two years they received two more tax penalty notices from IRS but declined to make the accounting procedure changes that I proposed to fix the problem and keep it from recurring. Last week they missed the January 31 deadline for reporting 1099 contractor payments, despite my recommendations, and are subject to additional penalties. Sadly, I concluded that resigning as their accountant was the right thing to do despite my warm feelings for the business. There is no indication that they have the management resolve to address their obvious systematic problem. IRS is picking up the pace in penalizing small charities and I anticipate more trouble ahead for any small business that chooses to be unaware and unresponsive to these changes.
In contrast, another small business client – a self-employed individual operating as an S corporation – has more open tax problems accumulated over a number of years than I have been able to count yet. He missed informational filings with the IRS, state tax filings and local government over several years. The penalties and interest are now more than the original taxes – somewhere above $25,000. Somehow he managed to avoid the most severe penalties. Yet in my recent work negotiating and resolving some old problems I actually triggered a new automatic tax penalty of $30. This penalty assessed was small compared to what the more severe penalties could have been. Both the client and the tax agents know that we are making progress toward resolution and compliance in good faith. In this case I have no problem working with the business despite the tax penalty risks. This self-employed learned an expensive lesson but now has the cooperation of a good advocate and the tax collectors.
The message I intend to convey here in this post is that attitude and intent can carry more weight than the letter of the law when it comes to tax compliance.