Over the last 20 years of being an accountant, I’ve opened my fair share of mail to find tax notices so daunting they could wake you in cold sweat. These letters—from federal, state, or city agencies—might demand income tax, franchise tax, sales tax, unemployment insurance, or workers’ compensation. Founders and finance teams often tell me these notices cause sleepless nights. Trust me: ignoring them only makes things worse. Below are three real-life examples of how our clients faced these “scary numbers” head-on and came out on top.
The shocking notice
Imagine seeing a letter that says you owe nearly half a million dollars in back taxes. That’s exactly what happened to one of our clients—a VC-backed New Jersey tech firm—when a former California-based remote employee applied for unemployment benefits in 2021. Suddenly, the State of California decided to audit and claimed almost $480,000 was due.
Piecing together the puzzle
- Revenue estimate gone wrong: California assumed the company made $3.2 million in 2021. In reality, revenue was closer to $300,000.
- Tax math: An 8.84% flat rate on $3.2 million equals $283,415. Then they tacked on a $70,000 delinquent penalty, another $70,000 demand penalty, and $52,000 in interest—adding up to $477,594.
Turning the tide
- Act fast: The notice gave a deadline of December 6, 2024. Missing it would have triggered more penalties.
- Register properly: We helped the client register to do business in California.
- File the real numbers: By preparing the actual 2021 corporate return, we proved the tax owed was $800 as the company was operating in losses and only owed the minimum franchise tax. After late fees and interest, the total was about $2,000—not $478,000.
Result: A nearly $476,000 savings.
Takeaways for Founders
Read the notice and pay attention to deadlines provided – if you are using an accountant provide the notice to the accountant to handle in a timely manner. Stay on top of your accountant to ensure that they have communicated on time with the State and file any delinquent tax returns required. Make sure to open any and all mail you receive from the State. In the era of remote work where PO boxes and Virtual mailing addresses are being used, it can be easy to drop the ball on a tax notice.
A $29,000 Surprise courtesy of the State of Delaware
Can a simple mistake in using the wrong address on your Delaware Franchise Tax Return cost your startup $29k? Our client found out this the hard way. A common mistake we’re finding among early-stage companies incorporated in Delaware is using their registered agent’s address on all company correspondence which is explicitly not allowed. The State of Delaware rejected the tax return and it wasn’t until 12 months later when the client went to obtain a Certificate of Good Standing that they realized their was an issue.
Resolution: An amended Delaware Franchise Tax Return had to be filed, resulting in no additional taxes or penalties due, as a $500 payment was made with the initial filing. We recommend companies registering to do business in Delaware to either open a virtual office or mailbox if they don’t have a physical address or are located overseas. Ideally, choose a virtual office provider that will scan and forward all your mail to you in a timely manner.
New York State Unemployment Tax Glitch
Not every notice is user error. One client got a letter from the New York State Department of Labor demanding $250,920 in unemployment taxes—when they actually owed $2,500. The notice felt like a ransom note.
Our client called the tax agency and it appeared to be a clerical printing error – From the client – “Got off the phone with Dept of Labor and they had a glitch that added 2 zeros to wages for everyone. Lol! They said no action needed and they’ll send out a revised version when they get it all fixed.”
Result: Zero dollars paid, zero penalties.
Key Takeaways for Founders
- Read Notices Carefully: Pay attention to deadlines.
- Involve Your Accountant: Forward all tax notices immediately.
- Monitor Your Mail: Use reliable mailing addresses to ensure you receive notices.
- Act Promptly: Late responses incur severe penalties and interest.
Don’t let a tax notice keep you up at night. With rapid fact‑finding, timely responses, and the right partners at your side, those daunting numbers become manageable challenges.
Ready to face your next tax notice with confidence? Contact ShayCPA today and discover how we help founders turn scary numbers into straightforward solutions.
Disclaimer:
The content provided on this blog is for general informational purposes only and does not constitute professional accounting, tax, or legal advice. Reading or accessing this material does not create a CPA-client relationship, nor should it be construed as a substitute for individualized guidance from a qualified professional. While we strive for accuracy, Shay CPA PC makes no warranties—express or implied—about the completeness, reliability, or timeliness of the information, and we expressly disclaim liability for any errors or omissions. You should not act or refrain from acting based on any blog content without seeking the advice of a qualified CPA or other professional who can address your specific circumstances. Links to external resources are provided for convenience only and do not imply endorsement. Shay CPA PC is under no obligation to update this content and disclaims responsibility for decisions made in reliance on it.
