SHORT-CHANGED Cash-short businesses withhold withholding taxes

December 23, 1991|By Michelle Singletary | Michelle Singletary,Evening Sun Staff

A chart on page E1 of yesterday's Evening Sun incorrectly listed the amounts of withholding taxes due the federal government from businesses nationally. The chart should have indicated that businesses owed the federal government $5 billion in 1991, $4.6 billion in 1990 and $4.7 billion in 1989. The Evening Sun regrets the error.

When cash is tight and getting a bank loan impossible, some business owners can't resist the temptation to dip into the money they withhold from employee paychecks to pay taxes.

The withheld money is an easy target of opportunity because it often accumulates in bank accounts for weeks or months after being collected before it is to be turned over to the government.

FOR THE RECORD - CORRECTION

One local manufacturing company that went bankrupt last year and was subsequently sold owed the Internal Revenue Service and the state more than $300,000, most of it in withholding taxes.

The new owners of the business became liable for the taxes and it will probably take them six years to pay them off.

"If a business doesn't have the money to pay its withholding taxes . . . if it's a choice between paying wages, buying materials or keeping the lights on, then the owners should shut down because it means their cash flow isn't sufficient," said one of the new owners of the business.

But thousands of businesses have not closed and instead have opted to shortchange the state and federal government by not paying withholding taxes.

The state comptroller's office reports that at the end of fiscal year 1991, $37 million in state withholding taxes, including local piggy-back taxes, had not been paid as required by law.

In addition, $6.5 million is tied up in bankruptcy court as a result of businesses filing for bankruptcy protection. The $37 million does not include penalties, according to Marvin Bond, assistant state comptroller.

"This kind of thing turns up every recession," Bond said. "Cash gets tight and sales go down so the withholding money becomes a source of cash. But it is one of the biggest problems small businesses get themselves into."

Companies collect withholding taxes from their employees' pay and are bound by law to turn the money over to the government. It is illegal to use that money for any other purpose. Typically businesses are required to pay state and local taxes once a month. In most cases, businesses are required to pay federal withholding taxes four times a year.

Nationally, businesses currently owe the federal government about $5 billion in taxes and penalties, according to an IRS spokesman.

Maryland and Washington are part of the same district where businesses have a $170.8 million overdue tax bill, according to Domenic LaPonzina, a spokesman for the Baltimore District of IRS.

In fiscal year 1990, the federal government collected $367.2 billion in "trust-fund" taxes or employee withholding and Social Security taxes, according to an IRS spokesman.

Of the $4 billion collected in income taxes in Maryland, about 75 percent is employee withholding taxes, he said.

In a recession or economic downturn, the temptation is greater to borrow the withholding money, Bond said.

Owners rationalize that it's just a short-term loan that they can pay back when business picks up the next month or quarter.

"Wrong," according to Morton D. Goldman, managing partner of Grant Thornton's Baltimore office. Grant Thornton is a national accounting and management-consulting firm.

"People believe that business will improve and they will use those funds from time to time thinking they will pay it back. But a lot of times it doesn't happen that way," Goldman said.

In Maryland, the amount of unpaid withholding taxes has been constantly going up. In fiscal year 1989, the state was trying to collect $34.3 million. In 1990, it went up another $5 million.

More alarming is the amount of state money that becomes tied up in bankruptcy court, Bond said. In fiscal year 1990, businesses filed for bankruptcy owing $1.7 million in withholding taxes. This year it jumped to $6.5 million.

Bond that said as the number of delinquencies began to increase last year, Comptroller Louis L. Goldstein began to implement aggressive collection procedures.

This past spring, 75 state workers were moved from areas such as data processing and accounting to help collect taxes.

The effort produced $15.5 million. But as fast as delinquent accounts were collected, other businesses fell behind, so the comptroller asked the state legislators for $600,000 to hire outside collection contractors who could work full-time to muscle businesses into paying back taxes. Professional collectors also were hired to collect back taxes from individuals.

The legislature gave Goldstein the money and about 23 people were hired, resulting in another $12.5 million collected between July and November, Bond said.

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