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Defending the Small Business - Part 13 - Uncle Sam, The Sleeping Giant 11/6/2008 6:27:36 PM
Massive government handouts have been dominating the news recently, but for decades the government has been involuntarily financing thousands of small businesses. Another common killer of small businesses is taxes. Instead of accepting the fact that taxes must be paid, small business owners invariably will try to figure out a way not to pay them or feign ignorance as to their obligation to pay them. There are many different types of taxes, most of which are complicated, and the tax reporting and compliance is extremely onerous.
What makes matters worse is that most government tax collectors are understaffed and often slow to do their job. They frequently let small business owners get hopelessly behind in their taxes before they come down on them. Many times clients have come to me when they owe fifty or a hundred thousand dollars in back payroll taxes. With penalties and interest accruing, there is no way they will ever be able to pay the taxes they owe. Often they have no understanding of how to handle payroll, calculate withholding, or making tax deposits. Consequently they have no idea they are getting themselves in deep trouble.
Property tax collectors are the worst. I’ve had clients come in who haven’t paid property taxes in four or five years and nothing happens to them. Finally, when the taxing authority gets around to turning the matter over to an attorney, the amount due is so high the taxpayer can’t come up with the money.
In Texas, the State Comptroller over the years has been the most aggressive tax collector. Frequently, I get calls from clients who have or are about to have their businesses shut down because they haven’t filed their sales tax returns. Luckily the Comptroller hasn’t let them get too far behind, so in most cases they quickly pay up. Once they realize they have to file the returns timely and pay the tax, they adjust to it and it has little impact on their business.
Because a small business owner can operate for years without paying property taxes or properly reporting and paying payroll taxes, the government ends up financing their businesses. Most of the time SBOs don’t realize the business is losing money because they are not paying all their expenses. If they are on a cash basis for accounting purposes, which is common for small businesses, they may well feel like they are profitable when they are not.
Almost every Chapter 11 or 13 that I file for my small business clients involves substantial payroll tax liability issues. Tax liability has often been the primary reason a bankruptcy was necessary. For the SBO, collecting taxes for the federal government is a difficult, complicated, and hazardous task. It’s a shame that a better system can’t be found for handling this task. In the past, the government’s response has been to increase the penalties and interest for not properly reporting and paying payroll taxes. This just makes matters worse, because when the small business owner finally realizes he must pay, the amount due is often double the actual amount of original tax liability and growing at a stunning rate. Even if the small business owner wanted to pay, he has no possible way of doing it short of bankruptcy.
In recent years Congress has changed the tax laws to require more frequent payroll deposits. This is a better approach, but one still difficult to enforce. Perhaps what needs to be done is to require a small business license which requires them to pass a test to show that they have a full understanding of how the tax system works and their responsibilities to pay and collect taxes for the government.
We require people to understand the driving laws before we let them out in the street, so why not make sure they understand the tax laws and other laws pertinent to operation of a small business?
A small business test would be a win-win solution because most SBOs want to be successful and want to pay all their bills. Rarely do I come across a business owner who is intentionally trying to evade taxes. Usually clients get into tax traps out of ignorance or because, when times get tough, they know the IRS will be the last one to come down on them. Optimistic by nature, the SBO believes in his heart that before the hammer will fall, his business will turn around and he’ll be able to pay his taxes.
Of course the other solution is to take this liability off the shoulders of SBOs and eliminate the income tax altogether. But until that happens every SBO needs to learn how the tax systems works, accept the fact that these taxes must be paid, and then make it his first priority to properly report and pay his taxes. If this is too difficult, then the easy solution, and the one I use, is to hire a payroll service so you don’t have to mess with it. These services are generally very cheap when you consider the burden they take off your shoulders, and they will allow you to focus on more important aspects of your small business.
