Working Minors Must Be Supervised by an Adult, Or Serious Penalties can be Assessed

School is out and many minors are looking for summer jobs.  Employers should be aware that special rules apply when employing a minor (any person less 18 years of age).  For example, a minor may not be employed unless the employer or another employee 18 years of age or older provides supervision.  Supervision means being on the premises to direct and control the work of minors and to assist in case of an emergency.  Generally this requires the supervisor to be within sight and sound of the minor.   Even a very mature seventeen year old cannot be allowed to work without adult supervision.

Failure to properly supervise a minor in the workplace is a violation of both the Michigan Youth Employment Act and the Health and Safety (MIOSHA) standards.  A violation of the Michigan Youth Employment Act is a misdemeanor and punishable by imprisonment of not more than 1 year or a fine of not more than $500.00 or both.

Serious penalties also apply for employing minors in occupations involving cash transactions after sunset or 8:00 p.m., whichever is earlier, without the required supervision. A violation of this particular provision of the Michigan Youth Employment Act is a misdemeanor and punishable by imprisonment of not more than 1 year, or a fine of $2,000 or both.  Repeated violations may lead to imprisonment for up to 10 years and a fine of not more than $10,000, or both.

This violation of the law could also possibly lead to civil liability if a minor were injured as a result of the lack of supervision.

This article was written by Natalie C. Najarian, Associate at Demorest Law Firm. Click here to view her professional resume.

Troubled Companies & The Trust Fund Recovery Penalty

Many financially distressed companies accumulate large liabilities for employment taxes withheld from their employees’ wages. These taxes can be assessed personally against the company’s principals.

When a company fails to pay its Federal employment taxes, the trust fund portion of those taxes can and will be assessed personally against the business’s “responsible persons” (such an assessment is called a “trust fund recovery penalty”).  “Trust fund” taxes are those that the employer is required to withhold from employees’ wages and pay over to the IRS.    They include withheld income tax, Social Security tax, and Medicare tax.  Many states, including Michigan, also impose a trust fund recovery penalty for state income tax withheld from employees’ wages but undeposited with the state taxing authority.

A responsible person is one who decides how the company uses its available cash. In the IRS’ view, one who has the right to determine how a company uses its cash, even though he or she does not exercise that right, can be a responsible person.   Signature status over a company’s bank accounts is a telling indicia of responsible personhood.  A company’s chief executive officer is nearly always deemed a responsible person.

Nearly every company has at least one responsible person; it is a rare company that does not have a responsible person.  Heroic efforts to prevent assessment of a trust fund recovery penalty usually are not worth it.  It is much more worthwhile to endeavor to confine assessment of a trust fund recovery penalty to one, truly responsible, person, and to start the collection statute of limitations running on the assessment.

Within about six months after a company fails to file an employment tax return, or fails to deposit employment taxes with the IRS, an IRS Revenue Officer will contact the company and attempt to bring it into compliance with the law.  If that doesn’t work, the Revenue Officer will initiate a trust fund recovery penalty assessment, beginning with interviews of suspected responsible persons.  It is critically important that such persons immediately retain qualified counsel, and that the interviews not take place.  A target’s representative can instead complete a questionnaire for the target and submit it to the Revenue Officer.

If a target disagrees with a proposed trust fund recovery penalty assessment against him, he or she can appeal the proposed assessment to the IRS Office of Appeals.  If that is unsuccessful, the trust fund recovery penalty will then be assessed.  Upon assessment, a tax lien in the amount of the trust fund recovery penalty arises in favor of the IRS on all of the taxpayer’s property.  The IRS will record notice of the tax lien in the local register of deeds’ office, disabling the assessed target from selling or mortgaging real property.

The statute of limitations on collection is 10 years from the date of assessment for a Federal trust fund recovery penalty, and six years from the date of assessment for a Michigan trust fund recovery penalty.  Neither Federal nor state trust fund recovery penalties are dischargeable in bankruptcy.

A target against whom a trust fund recovery penalty has been assessed can litigate the assessment by paying trust fund tax for at least one employee for at least one calendar quarter   (this is called a “divisible portion” of the assessment), and then filing a claim for refund of it with the IRS.  Once the IRS denies the claim, or six months pass without IRS action on the claim, the target may sue in U.S. District Court, challenging the trust fund recovery penalty assessment.

The IRS can criminally prosecute a failure to deposit withheld trust fund taxes, and in the present economy it is doing so with increasing frequency.  A well-known Michigan restauranteur recently pleaded guilty in U.S. District Court in Detroit to a prosecution for failing to deposit trust fund taxes withheld from his employees’ wages.

Several things can and should be done to protect a company’s principals from trust fund recovery penalty assessments:

* The company’s CEO should monitor the company’s trust fund obligations and determine that they are being paid on a current basis.

* As soon as the company determines that it may not be able to fully pay its employment tax obligations as they accrue, the company should─

• prepare to cease operations as soon as possible; and
• specifically allocate any further payments of employment taxes as against the company’s trust fund obligations.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.

The Right Tax Resolution

Successful resolution of tax controversies is all about experience and instincts.

When the Internal Revenue Service (“IRS”) conducts an examination and determines to make an assessment, it must issue to the taxpayer 30 days’ written notice of  its intent to make the assessment.  If the taxpayer appeals the proposed assessment within the 30-day window, the assessment will not become final until the IRS Appeals Office has completed its review of the case.  If the taxpayer files a timely petition with the U.S. Tax Court, the assessment does not become final, if at all, until the Tax Court renders its decision on the case.  In addition, a taxpayer can gain jurisdiction to litigate a civil tax case in the U.S. District Court or the U.S. Court of Federal Claims by paying at least part of the assessment and then suing for a refund.  Though we’ve litigated in all of these courts, we find that litigation of civil tax cases is usually unnecessary.  We enjoy an excellent working relationship with the IRS Detroit Appeals Office, and we find that we can successfully resolve most of our civil tax cases there.

Once an assessment is made, and it remains unpaid, a lien arises by operation of law in favor of the IRS in all property interests which the taxpayer then owns or thereafter acquires.  The lien remains in effect until the assessment, including penalties and interest, is paid in full, or the collection statute of limitations expires on it.  The IRS records  written notice of the lien in the Register of Deeds’ office for the county of the taxpayer’s residence, thereby clouding title to the taxpayer’s real property, and impairing the taxpayer’s credit standing.  But if the taxpayer arranges with the IRS to pay the assessment within one year, the IRS may refrain from recording the tax lien notice.

If the taxpayer does not enter into an installment agreement satisfactory to the IRS to pay the assessment, the IRS will periodically levy (seize) the taxpayer’s property, until the assessment is paid in full.  The IRS prefers levying liquid assets, such as bank and brokerage accounts and wages.  In unusual circumstances the IRS levies real property.  Before levying, the IRS must issue written notice of its intent to do so to the taxpayer, but the IRS need only  issue a notice of intent to levy once as to a given assessment.

When a client comes to us owing a balance to the IRS, we call the IRS and have a hold placed on collection action against the client.  Then we secure transcripts of the client’s Federal tax accounts. We analyze the transcripts and determine whether the client has been penalties abatable for “reasonable cause.”  Examples include errors in tax returns, or  failure to timely file tax returns or pay tax,  attributable to malfeasance by the taxpayer’s accountant or attorney, embezzlement perpetrated against the client by an employee, or economic factors beyond the taxpayer’s control.  Denial of a request to abate penalties can be appealed to the IRS Appeals Office, often with favorable results.

Once we have satisfied ourselves as to the propriety of the assessment, and if the client is unable to pay the balance in full, we seek to enter the client into an installment agreement with the IRS.  This requires gathering financial information on the client and submitting it to the IRS.  If the financial information indicates that the client is unable to pay anything to the IRS, the IRS will post the account as “not currently collectible,” and leave the client alone for the time  being.

An offer in compromise is rarely in the client’s best interests.  The IRS almost always rejects them.  The making of an offer in compromise extends the 10-year statute of limitations on collection of an assessment for the pendency of the offer, plus six months.  Plus the client is out the fees incurred to prepare and submit the offer.  If the IRS determines that an offer is “frivolous,” then the client is subject to a $5,000 penalty, as is the preparer.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm. Click here to view his professional resume.