Labor Smart Inc (LTNC)

[DD2Gain]

Holy Wow! $1,019,923 delinquent to the IRS!

On March 17, 2014, the Internal Revenue Service agreed not to take collection action against the Company for payroll tax liabilities as long the Company remains current and makes monthly installments against outstanding liabilities (“Installment Agreement”). The agreed monthly installments are $5,000 which increases to $10,000 on July 28, 2014 which further increases to $15,000 on July 28, 2016. On the date of the Installment Agreement, the total amount of our federal tax liability was $1,019,923, all of which is included in the Installment Agreement. Interest under the Installment Agreement accrues at 3% plus the published Applicable Federal Short Term Rate (“AFR”) per annum. The AFR as of August 4, 2014 is 0.36% per annum. At June 27, 2014 and August 4, 2014, we were in full compliance with the terms of the Installment Agreement.

Finally, after MONTHS of having this delinquency on the table Schadel reveals the total amount owed. It's really bad, but is it the TOTAL amount? Is "federal tax liability" the same as total liability including penalties, fees, and interest? By March 17th Schadel had been late with payroll taxes, received notice, and negotiated payment arrangements with the IRS. I'd say the debt was accrued before February 1st, which would give 45 days to go through the procedural steps and settle on this arrangement. There is absolutely no way Schadel accrued even $500,000 in payroll taxes for January or even by March. Cost of sales, of which only a percent would be payroll for temporary workers, was a total of about $3.7 million for the first quarter, so $2.5-$3.7 million through February. In fact, under "Payroll taxes payable" we can do the math and see that about $500,000 is owed for the entire first 6 months of operation once we subtract the delinquency.

How much of this delinquency is from 2013 when Schadel insisted he was current on all taxes? Wasn't there a $1 million carry-over in payroll taxes from 2013? How much in extremely expensive penalties is Schadel covering up? How much additional penalties are expected to be assessed as the years roll on with a balance due? Quite a lot as we can now see, but only guess as to the exact details since Schadel can't bring himself to be clear on what the principle delinquency was. OTH, if over $1 million IS the principle that installment arrangment is for AT LEAST 10 years and WILL easily be for more than $1.5 million total. I would not be surprised if it breaks $2 million for having used payroll taxes as a way to fund acquisitions and pay himself back most of his personal loan to the company.

Real smart there Schadel.