Taxable Talk

One of the surest methods I know to get the IRS upset with you is to withhold payroll taxes and not remit them. Payroll taxes are called trust fund taxes; I've yet to know of a time when the IRS hasn't gone after a business that failed to remit those taxes. I'm also unaware of any case where the IRS hasn't pursued a payroll service who failed to remit trust fund taxed on behalf of employers it serviced.

James McLamb, of Raleigh, North Carolina, was CFO of the Castleton Group. Castleton serviced about 100 employers in the Research Triangle area of North Carolina. Serviced, though, may be the wrong word to use for Castleton; scammed appears to be more apropos.

McLamb had a unique method of handling trust fund taxes. He'd calculate the correct amount of taxes, accept those remittances, and then change the numbers to much lower figures. He'd use the lower numbers to report payroll to the IRS and the North Carolina Department of Revenue. It's unclear from the news story where the $8 million that was supposed to go to the IRS ended up; suffice to say it didn't end up in the U.S. Treasury and likely lined McLamb's pockets.

The fallout from this mess is what you'd expect. McLamb has pleaded guilty to defrauding the United States; he'll likely be sentenced to a lengthy term at ClubFed later this year. Castleton is bankrupt; it's owner blames McLamb for the company's problems. The employers who trusted Castleton still have to remit the taxes to the IRS & North Carolina.

I strongly advise my corporate clients to use a reputable payroll service. This is not an area to skimp on—the penalties are high for mistakes and owners can and are held personally liable when mistakes occur. Finally, if you think that an idea like McLamb's will work over the long term you're badly mistaken. Trust fund taxes are heavily scrutinized and the government will come after you.

Richard Hatch has appealed his guilty verdict to the US Supreme Court. Hatch's attorney told the Associated Press, "He's extremely optimistic about his appeal...He still believes the system should work." Hatch is appealing alleging that the judge improperly limited his testimony and that the judge unfairly limited his cross-examination of the accountant who prepared his tax returns.

The Court of Appeals rejected Hatch's appeal earlier this year. Indeed, the Court of Appeals summarily rejected each argument that Hatch is now making, noting, "Here, the district court's limitations on cross-examination in this nine-day trial were thoughtful and far from being excessive" and

The court thus opened the door for defense counsel to ask Hatch whether Burnett or someone else at SEG had promised to pay the taxes on the money he won. Hatch's counsel, however, did not follow up with questions of this sort.

Like Mr. Hatch and his attorney, I believe that the system should work. Unlike Mr. Hatch and his attorney, I think it has.