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  IRS Proposed Assessment of theTrust Fund Recovery Penalty Notice 1153 Needs to be Protested Before 60 Days of Date on Letter 

What Exactly are Trust Fund Taxes?

When a business collects the withheld income tax from its employees, the employers are considered to be holding the funds in trust (of the employees) to hand over to the Department of Treasury by making federal tax deposits based on their deposit schedule (most small businesses are monthly or semi-weekly depositors) and reported on Form 941 or 944.  

Sales Tax is another trust tax but this only applies for states. 

 

What is the Trust Fund Recovery Penalty Interview and Do I have to Attend?

When a company is created as a separate entity such as a corporation or a limited liability company and the business entity falls behind with its payroll tax the IRS will issue a notice requesting a meeting with the owner(s), major shareholders, and even bookkeepers if they feel they may be responsible for the trust fund taxes.  The IRS has recently started going after payroll companies as well as posted on my blog.

 

How Do I Know if I was Assessed with the IRS' Trust Fund Recovery Penalty?

After the IRS conducts the TFRP Interview the Revenue Officer will determine who it deems 'willful' and 'responsible'.  If the IRS deems you willful and responsible for the non-payment of trust fund taxes they will issue Notice 1153,  Notice of Proposed Assessment of the Trust Fund Recovery Penalty.

 

Who can be Responsible for The Trust Fund Recovery Penalty (100% Penalty)

Anyone who is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and willfully fails to collect or pay them.

 A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

  • an officer or an employee of a corporation,

  • a member or employee of a partnership,

  • a corporate director or shareholder,

  • a member of a board of trustees of a nonprofit organization,

  • another person with authority and control over funds to direct their disbursement, or

  • another corporation.

  • a payroll company that was hired to make federal tax deposits for a business.

For willfulness to exist, the responsible person must have been, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

What happens when the IRS assessed someone with the Trust Fund Recovery Penalty?

The IRS will first slap a Federal Tax Lien against you personally. Once the Notice of Federal Tax Lien is in place expect to start receiving a series of notices stated that you owe a civil penalty and must contact the IRS within so many days to avoid levy action.  

 

How to Protect Yourself from the Trust Fund Recovery Penalty

Trust Fund taxes can be a tricky issue to resolve.  They can not be discharged in a bankruptcy.  The methods posted below are commonly used to resolve and/or stop the assessment of trust fund taxes.

How to Appeal (Protest) the Proposed Assessement of Trust Fund Recovery Penalty

Click for Form 4180 Trust Fund Recovery Penalty Interview

The IRS considers back payroll tax debt as the most serious of all tax debts. The IRS views operating a business while owing back payroll taxes as illegally borrowing money from the government. The IRS can seize assets and force you out of business if you owe back payroll taxes.

The scary thing about payroll taxes is that the IRS can assess a portion of the tax, called the Trust Fund Recovery Penalty, on individuals it believes had authority to collect and pay the tax. This can be an owner manager and even a bookkeeper.

The number one reason we have business clients is because of unpaid payroll taxes. Each scenario basically works similar to this:

Business is slow. You pay the rent and your employees’ wages, but don’t make your federal tax deposits. You believe that things will turn around next month with more work. The busy season is right around the corner and you are sure that you’ll be able to pull out of this slump catch up on your back payroll taxes.

Several months go by. Your sales have gone down. Orders stopped coming in and holiday sales were awful. Your vendors have sued you and your landlord is threatening to evict you. You haven’t been filing your 941 returns or made any federal tax deposits for the last several quarters. You decide to shut down and sell your assets to pay off the creditors you have personally guaranteed.

You feel that you are ready for a fresh start with everyone paid off. But wait. The IRS sends you a notice saying that they intend to hit you personally with a 100% penalty for non-payment of payroll taxes, also know as the dreaded “Trust Fund Recovery Penalty”.

When payroll deposits haven’t been made, the IRS can review a company’s books, interview employees and then hold its owners, managers, bookkeepers and check-signers personally responsible for the unpaid payroll taxes. This penalty applies mostly towards corporations. If you were a sole proprietorship, LLC or partnership, you can be found directly responsible for payroll taxes without the TFRP provision.

How the IRS Determines Who is Responsible for the Trust Fund Recovery Penalty

Per Section 6672 of the Internal Revenue Manual:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable for a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Usually, the corporation is well-intentioned and truly believes that it will be able to pay back the unpaid deposits in a relatively short period of time (i.e. before the IRS comes calling). In practice, however, this rarely happens.

What is more common is that the corporation is forced to continue to pay only the net payroll and use the IRS payroll tax funds to pay other corporate bills. After several successive quarters of diverting IRS payroll taxes, the IRS finally issues notices demanding payment of the undeposited taxes, plus interest and penalties.

If the company does not and cannot pay off the entire delinquent debt, including penalties and interest, the IRS will conduct interviews of its key corporate employees to determine who in the organization was responsible for the company’s failure to comply with the law. Responsible persons are assessed what is known as a Trust Fund Recovery Penalty  which is equal to the amount of the federal withholding taxes and FICA and medicare taxes withheld from employees pay. 

The interviews are called Form 4180 interviews because the form the IRS collection agents are required to complete while conducting the interview is IRS Form 4180.

Generally, the IRS determines responsibility by determining which corporate employees, shareholders, directors and/or officers who, during the periods of non-compliance, made decisions regarding which creditors of the company received payment and which did not. The IRS determines this by examining the bank signature cards, reviewing the businesses canceled checks and corporate documents and conducting interviews of third parties.

Lectric Law Library provies a good, brief summary of the law:

RESPONSIBLE PERSON – The “responsible person” penalty is imposed pursuant to 26 U.S.C. S 6672: Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, . . . shall . . . be liable to a penalty equal to the total amount of the tax . . . not collected, or not accounted for and paid over.

The IRS may recover a section 6672 penalty only if it shows that the individual (1) was a “responsible person ” and (2) acted willfully in failing to collect or pay over withheld taxes. Davis v. United States, 961 F.2d 867, 869-70 (9th Cir. 1992).

A person is responsible for the payment of trust fund taxes for purposes of the section 6672 penalty if he had the “final word on which bills should or should not be paid.” Maggy v. United States, 560 F.2d 1372, 1374 (9th Cir. 1977). The “final word” “does not mean `final’ but instead `the authority required to exercise significant control over the corporation’s financial affairs, regardless of whether[the individual] exercises such control in fact.’” United States v. Jones, 33 F.3d 1137, 1139 (9th Cir. 1994)

See also Alsheskie v. United States, 31 F.3d 837, 839 (9th Cir. 1994). A person who does all he can to cause taxes to be paid, and whose efforts are rejected by those with more control, is not a “responsible person.”

It is possible that a person who is not a shareholder, director or officer will be found to be responsible and an individual who is a shareholder and director will be found not responsible. Many unsuspecting bookkeepers have been hit with a trust fund penalty because their bosses had them sign all the checks and the IRS used this fact as evidence that the bookeeper and not the owner/President chose which creditors to pay.

There are two compelling reasons why you should never attend a 4180 interview without having an attorney present. First, at the end of the interview the IRS agent will require you to sign the form 4180 under penalties of perjury. You don’t want to say something that is inaccurate and unwittingly open yourself up to a criminal perjury prosecution. Second, the IRS agent will use anything you say in the interview against you in determining whether or not you are a responsible person. Remember, the IRS wants as many people as possible to be responsible because that increases its chances of collecting the penalty.

The IRS can go after each responsible person or it can choose to focus its collection efforts on only one person. It has no duty to be “fair” and collect the same amount from each responsible person, they can assess different periods based on who they deem as willful and responsible for the non-payment of the trust taxes.

If you were in a business that didn’t pay its payroll taxes and have been or think you might summonsed for a 4180 interview, contact an experienced enrolled agent who unlike attorneys (who usually are spread thin by working several areas other than tax law), deal with nothing other than representing their clients before IRS.

The IRS makes over 50,000 TFRP assessments each year, averaging $21,000 per responsible person.

For each defunct business owing payroll taxes the IRS on average finds 1.6 responsible persons but it is not uncommon for several people to be declared responsible. The IRS can still assess the trust fund penalty if the business is still open. Then they have not only the individuals to collect from but also the business.

Revenue Officers will conduct what they call the Trust Fund Recovery Penalty Interview and begin by putting together a list of people with any authority over the businesses finances.

    Who made the financial decisions in the business?

    Who signed or had authorization to sign on the checking account?

    Who had the power to pay or direct payment of bills?

    Who had the duty of tax reporting?

To get this information the officer may interview everyone whose name comes up when she asks the above four questions. She looks at bank and corporate records for the names on bank signature cards, and to find out who actually signed checks and who were corporate officers.

The Trust Fund portion of payroll taxes is not a dischargeable tax debt in bankruptcy, however they can be resolved through an Offer in Compromise, payment plan, or placed into a not currently collectable status.

Appealing the Trust Fund Recovery Penalty

Once you are found to be a responsible person by a revenue officer, you will be sent a notice and a tax bill. The revenue officers decision can be protested to the appeals division.

From the date of the initial notice you have 60 days to file an appeal. To do this you must prepare a written response protesting the decision to the Appeals Office. If you fail to use your appeal rights, 60 days from the initial notice (notice number 1153), the assessment becomes final. If you refuse to pay the IRS can go through its normal collection process for a tax debt, i.e. file a lien, and then levy.

Even by simply filing the appeal of the proposed TFRP assessment it will buy you time- even if you know you are clearly responsible. An IRS collector can’t take enforced collection action. Another advantage for filing an appeal is that interest does not run during the time an appeal is being considered, which could give you time to catch up on the payment. For example, if you are eventually found responsible for $50,000 in unpaid payroll taxes and your appeal process takes a year, you’ll avoid paying approximately $3,500 in interest.

If you lose your appeal and feel you truly are not responsible go to court. You can no longer sue in tax court, but may be able to find some success in the U.S. District Court nearest you or in the U.S. Court of Claims. In 2006 Tax court doesn’t require you to pay the IRS any tax before filing our suit. However, if you sue in a district court or the court of claims, you must first pay at least some of the taxes claimed before you file a lawsuit seeking a refund. The minimum you must pay is equal to the unpaid payroll taxes due for one employee for one quarter of any pay period.

We have laid out the process in plain English, but the truth of dealing with the IRS is that it may not be this simple.

Hire an Experienced Licensed Representative

We offer a full tax analysis without cost or obligation. Contact Nicholas Hartney, EA of Patriot Tax Resolution, LLC today and he will  go into more depth about your particular situation and advise you on what programs you qualify for.

 

 

 



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