I was just informed about a friend's company's bankruptcy. They started a professional services firm and made millions of dollars within a year of starting. But the company had two partners and one of the partners served as CFO. The CFO for whatever reason knowingly or unknowingly stopped filing payroll taxes. As it is a given, the IRS/state stepped in and both the partners were held personally liable.
To me that represents a scary situation. I am a moral and loving citizen of our beautiful country and I would never do something like that but what can one do to prevent this kind of a situation from taking place? Because what if your CFO or founder is committing fraud and hiding it.
Is it advisable to always have a trusted third-party accounting/payroll company to do the work?
A payroll Service can help, but the same issues apply unless the other partner is looking at the Payroll Summaries. Hopefully your friend is still within the 60 day window to appeal his assessment. In this particular situation, both business common sense and protecting yourself from IRS Trust Fund Assessment go hand in hand. Anyone who has potential control over the ability to pay a bill, or write a check, can be assessed. The main thing to do is, as mentioned before, is to make sure that on a weekly/monthly basis, the owners/officers not in charge of Payroll have a meeting and request to look at the Payroll reports/Summary, etc. In this case, having a Payroll company doing a direct debit of the taxes makes it easier to see the taxes are being paid. Additionally, the non-payroll involved person should also have a power of attorney for the IRS (Form 2848) for several Payroll periods, to be able to call in and see if the payroll deposits are being made, and the returns are being filed. (or they can have their attorney do it for them :) There is no excuse as far as the IRS is concerned for an officer or owner not to diligently check up on their partner, regardless of how close the relationship is.
Yes, no question. A payroll service such as ADP is the way to go. Even well meaning people can make mistakes with payroll taxes, and the consequences could be huge.
An important tip for dealing with business partners: trust but verify! Make sure that you and/or a third party service provider is watching the business like a hawk - especially where taxes and the books are concerned.
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