Archive for Sunday, March 25, 2001

Dot-com failures to test integrity of spurned workers

March 25, 2001


Margee Fagelson lost her first dot-com job last year when went belly up in February. Then came the shutdown of Virtual Communities, which had hired her as a consultant, and VSlash, which went poof before paying her a $3,000 consulting fee.

Now, the Internet meltdown has visited a final indignity upon the 35-year-old music media consultant from New York: With less than a month to go until tax day, two of these former employers haven't sent Fagelson the forms she needs to file her return.

Of the more than 210 dot-coms that choked to death on the "new economy" last year, many simply boxed up their records and walked away from the wreckage.

That has presented Fagelson and possibly thousands of other dot-com casualties with an intriguing dilemma: to pay or not to pay their taxes.

Legally, of course, there is no choice; income taxes must be paid. Even if companies flout the law by failing to send tax information to employees and contractors, the workers are expected to calculate their tax bills based on pay stubs, invoices, bank records or even memory.

Those who don't pay face hefty fines or even prison if they get caught.

So Fagelson could spend dozens of potentially fruitless hours tracking down her former bosses.

Or, following the proud tradition of Internet entrepreneurs who profited by casting aside traditional rules of business, she could take advantage of the missing documents and reduce her tax bill.

"I think about this all the time," said an exasperated Fagelson, who practically is broke and isn't sure where she'll find the money to pay any of her taxes that weren't already withheld. "I don't want to get thrown in jail. But it's like it's only illegal if you get caught, and I think my chances of getting caught are slim to none."

Dot-com failures rise

After a year that transmogrified hundreds of Internet companies from stock-market darlings to profitless pariahs, Fagelson's predicament is hardly unusual. Between 12,000 to 15,000 workers lost their jobs last year as a result of dot-com closures, according to, a research firm that tracks Internet mergers and acquisitions.

For workers who think they still owe taxes, the incentive to cheat is powerful.

A W-2 states how much money was paid to an employee during the course of a year, along with the amount of money withheld for federal income, Social Security and other taxes.

Companies are supposed to issue a 1099 to document payments to independent contractors whenever they pay a self-employed individual $600 or more in a year.

Companies must make W-2s and 1099s available to their employees and contractors by Jan. 31.

If companies fail to provide the information, there is little the Internal Revenue Service can do. The burden falls on workers to reconstruct their income themselves. It is a relatively easy process for those who have bothered to save their pay stubs.

Taking a gamble

James Counts II, a Hemet, Calif., accountant who specializes in serving small companies, said that if neither a company nor a worker reported income to the IRS, tax collectors were "not likely to find out about it."

But others caution that there are many ways the government could discover hidden income, such as in a divorce proceeding or if the company's principals were audited.

People who try to conceal income from the IRS "are flirting with disaster," said David Flamer, a Los Angeles accountant and small-business consultant. "Sooner or later, it's going to be trouble."

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