IRS Trust Fund Help – Trust Fund Penalties & LLC’s – Former IRS
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Being Former IRS Agents many tax professionals call us with different tax related questions when it comes to certain issues with the IRS of a technical nature.
With IRS being very aggressive with payroll taxes and trust fund tax. IRS can hold those responsible for paying the payroll taxes responsible for the trust fund penalty or the payroll tax penalty. Those responsible parties will have to pay the withholding and one – half of the social security back to the IRS and will do so as part of an individual liability.
Definition of a Responsible Person
A “responsible person” is one who has the duty to perform or the power to direct the act of collecting, accounting for, or paying over trust fund taxes.
When evaluating responsibility, consider the Supreme Court decision in Slodov v. United States, 436 U.S. 238, 78-1, USTC 9447 (1978).
IRS Trust Fund Establishing Responsibility.
Most trust fund recovery penalty cases involve officers of corporations. However, a responsible person may be one or more of the following:
a. an officer or employee of a corporation
b.a member or employee of a partnership
c.a corporate director or shareholder
d.a related controlling corporation
e. a lender, a surety, or any other person with sufficient control over funds to direct disbursement of the funds, or
f. in some cases, a person assuming control after accrual of the liability.
In each situation, determine who had a duty to see that taxes were withheld, collected, or paid over to the government at the specific time the failure occurred. There can be more than one responsible person.
How a LLC to the IRS standard
The LLC makes the election on how it is to be treated for Federal Income purposes on the Form 8832. If no election is made for a single-member LLC it is defaulted as a disregarded entity.
The Form 2553 is used by a corporation to make the “S” election.
An owner of a disregarded single member LLC for the purposes of the employment taxes will be liable for the employment taxes only to the extent of IRC 6672.
A Single-Member LLC’s , Employment Taxes and the IRS
A “single-member” Limited Liability Company (LLC) will not always protect you from being personally liable for un-paid employment taxes.
A “single-member” LLC is an LLC that is owned 100% by a single owner/member and is referred to as a single-member LLC. Based upon the “check-the-box” regulations for classification of entities, a single-member LLC can be treated as a disregarded entity whereby the owner, rather than the LLC, is treated as the taxpayer.
Under the check-the-box rules, a single member LLC automatically will be treated as as a “disregarded entity” unless an election is made to treat the LLC as a corporation.
To the surprise of many single-member LLC owners who have not elected to be treated as corporations, the IRS has been able to disregard the state-sanctioned liability protections of a single-member LLC and go after the individual owner’s personal assets for the employment taxes.
The IRS announced in Notice 99-6 that for a disregarded entity such as a single-member LLC, the owner of the entity retains the ultimate responsibility for the employment tax liabilities with respect to the employees of the disregarded entity.
Thus, if the LLC does not pay the payroll taxes, the IRS will proceed against the owner of the LLC. Even if the single-member LLC files for bankruptcy, the IRS can collect from the owner of the of the single-member LLC.
The liability for employment taxes is a greater amount than the Trust Fund Recovery Liability under IRC section 6672. The Trust Fund Recovery Liability is for the employee’s FICA tax withheld and the income tax withhold.
As an owner of a single-member LLC, the liability is for Trust Fund Taxes plus the employer’s FICA taxes and the unemployment taxes.
The good news is that per amended Treasury Regulations 1.34-1, 1.1361-4, 1.1361-6 and 301.7701-2 that became effective January 1, 2009; the owner of a single-member LLC will not be held liable for the employment taxes of the LLC for wages paid after January 1, 2009.
Still, the owner of the single-member LLC will be held liable for the Trust Fund Recovery Liability under section 6672 for those wages paid after January 1, 2009.
The bad news is that any unpaid payroll taxes owed for wages paid before January 1, 2009 are still the responsibility of the owner of the single-member LLC. The IRS will go after his personal assets for the unpaid employment taxes.
Trust Fund Help, Trust Fund Penalties & LLC’s , Former IRS, Payroll Tax Penalty
