Business tax counsel for Baltimore companies

If the IRS or the Comptroller of Maryland is questioning your company's taxes, a Baltimore business tax attorney can help you respond. At Whiteford, we represent companies and their owners before both agencies. The IRS collects federal income and payroll taxes. The Comptroller collects Maryland income tax, withholding tax, and sales and use tax.

Some problems reach beyond the company. Unpaid payroll or sales tax can even become a personal debt of the people who run it. We also help owners plan ahead, from choosing a business structure to timing a 1031 exchange.

When unpaid payroll or sales tax becomes the owner's debt

Every employer withholds income tax, Social Security tax and Medicare tax from its employees' pay. Shops, restaurants and other sellers also collect Maryland sales and use tax from customers. That money belongs to the government. A business short of cash may spend it on rent or suppliers instead. The IRS and the Comptroller can then go after the people in charge.

The federal trust fund recovery penalty

For federal payroll taxes, the IRS uses the trust fund recovery penalty under IRC 6672. It lets the IRS collect the unpaid withheld tax from a responsible person who willfully failed to pay it over. That failure can also be charged as a crime, as our page on employment tax fraud explains.

The IRS must first propose the penalty in writing, in Letter 1153. From the date of that letter, you have 60 days to appeal. The appeal goes to the IRS Independent Office of Appeals.

If the penalty is assessed anyway, you can still get to court without paying all of it. Pay the withheld taxes of one employee for one quarter, and file a refund claim for that amount. Then you can sue for a refund in the Court of Federal Claims or the District of Maryland. The district court generally hears a Baltimore case in Baltimore.

Maryland's rules for officers, managers and members

Maryland has two rules of its own for this kind of money. Neither asks whether anyone acted willfully. For withheld Maryland income tax, the test is negligence. If the company negligently fails to withhold the tax or pay it over, a corporate officer who directly controls its finances can be personally liable. In an LLC, the same goes for anyone with that control (Tax-Gen. § 10-906(d)).

For sales and use tax, the law names who is personally liable for the tax, interest and penalties. In a corporation, that is the president, vice president and treasurer, and any officer who owns more than 20% of the stock, directly or indirectly. In an LLC that has an operating agreement, it is the people who manage the business. Without an operating agreement, it is every member (Tax-Gen. § 11-601(d)). So a Comptroller audit of a sales tax or withholding account can reach the people who run the company.

Drivers, laborers and other workers paid as contractors

A trucking company that serves the port may pay its drivers as independent contractors. So may a builder that hires laborers by the job. The IRS can test that choice in an employment tax audit. It looks at three kinds of evidence: behavioral control, financial control, and the type of relationship between company and worker.

Calling an employee a contractor without a reasonable basis can leave the company owing that worker's employment taxes. An audit that ends that way can bring a Notice of Employment Tax Determination. From the day it is mailed, you have 90 days to take the dispute to the U.S. Tax Court. A Maryland company can have that case tried in Baltimore.

Notices and audits from the IRS and Maryland agencies

Business tax disputes often begin with a notice. The IRS, the Comptroller of Maryland or the Maryland State Department of Assessments and Taxation spots something that looks wrong. The issue may be unpaid or late tax, an underpayment, an employment tax problem, a tax penalty, or a deduction or credit the agency questions. An IRS audit of the business return can raise the same issues.

We help you answer the notice and protect the company. Where the facts allow, we try to resolve a Maryland matter with the Comptroller, or on appeal, before it reaches the Maryland Tax Court. That court is based in Baltimore. The Comptroller's deadlines are short, and our Baltimore office page lists them.

Sometimes an agency says a gap was deliberate, most often that income was underreported or not reported at all. At that point, you need a lawyer who defends tax fraud cases. Our white collar tax defense practice in Baltimore works to limit the harm so the business can keep operating.

Choosing a structure and planning the year

An LLC and an S corporation can face different tax rules. The right structure protects a Baltimore business and avoids tax that planning could have prevented. In Maryland, the choice also affects who can be personally liable for unpaid sales and use tax, as explained above. We help owners plan through each tax year instead of reacting after it ends, including:

• Paying into retirement plans for owners and employees
• Managing asset depreciation and the timing of business expenses
• Putting off income and planning charitable gifts where that helps
• Handling estimated taxes and paying employment taxes on time

Federal and Maryland business tax rules change from year to year. We help clients adjust before new rules take effect, not after.

1031 exchanges and their deadlines

Section 1031 of the Internal Revenue Code lets an investor defer the capital gains tax on a real estate sale. It covers property held for business or investment. To defer all of it, you reinvest all the proceeds in like-kind property. A qualified intermediary is usually used. It holds the money in between, so the cash never reaches you. The deferred tax generally comes due when you later sell the replacement property.

Two deadlines apply, counted from the day you transfer the property you are selling:

1. Within 45 days, identify possible replacement property in writing.
2. Close on it within 180 days. If your tax return for the year of the sale is due sooner, counting extensions, close by that date instead.

For a sale late in the year, the return can come due before day 180. Extending the return can keep the full 180 days. Missing either deadline generally disqualifies the exchange, and the capital gains tax becomes due. We help Baltimore investors document each step so the deferral holds up under IRS review.