The Scenario – You need to make payroll this week, but you don’t have the cash. So, you go to Mom for a loan. She wants to help, but there are limits to her willingness. The result is that she writes you a check, labeled loan for the exact amount of the net payroll due that week. Is this a great idea?
The answer is absolutely not. IRC Section 3505 allows the IRS to collect unpaid Trust Funds from third party lenders who knowingly lent money for payroll when they knew the employer could not or would not deposit the payroll taxes. Taking a loan for the net amount of the payroll is reasonably good prof that the purpose of the loan was only for payroll and that it was likely that the deposit would not be made. The IRS could and will use this situation to assess the unpaid taxes on Mom who may no longer love you as much.
How do you avoid alienating Mom? The answer is to do what the professional lenders do to avoid this problem. First, they would never make the loan for the exact amount of the payroll. Secondly, they have written loan agreements that would NOT specify that the money was to be spent on payroll. This is a reasonably easy approach to avoiding putting Mom in a bad place.
If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email email@example.com .
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