Trust Fund Penalty IRS – How to WIN – IRS Trust Fund Penalty Defense – Former IRS
Trust Fund Penalty – How to WIN -Trust Fund Penalty Defense – Former IRS 1-866-700-1040
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We have worked hundreds and hundreds of trust fund recovery penalties when working for the Internal Revenue Service. Not only have we asserted the penalties as former IRS agents we also have on staff former appeals agents who completely understood the government’s position.
As a result of our years of experience we know the loopholes and certain defense arguments and strategies.
Contact us today for free tax consultation and see if there is anything we can do to go ahead and help when your trust fund penalty case.
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How to save yourself from the Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty (TFRP) is a penalty provided by IRC 6672 against any person required to collect, account for, and pay over taxes held in trust who willfully fails any of these activities. The penalty is equal to the total amount of tax evaded, not collected or not accounted for and paid over to the Government.
The penalty is applicable for many types of taxes, but the most common application of the TFRP is for unpaid employer’s taxes on Form 941. The TFRP is not dischargeable in bankruptcy.
The trust portion of the employment taxes (Form 941) consist of the amount of withholding for the Federal Income Tax and for Social Security. The only way to fully protect yourself from the application of the TFRP is to always pay these taxes to the Government, even if you don’t have the funds for any other expenditure. Don’t forget, the amounts withheld are not yours, you are holding those funds in trust for the Government!
For the assertion of the Trust Fund Recovery Penalty (TFRP), the IRS must establish that a person is “responsible” and also “willfully” failed to collect or pay over the trust fund taxes to the government.
Potential “responsible” persons include:
1. Officer or employee of a corporation.
2. Partner or employee of a partnership.
3. Corporate director or shareholder.
4. Employee of a sole proprietorship.
5. Surety lender.
6. Other person or entity outside the delinquent business organization.
A “responsible” person has:
1. Duty to perform.
2. Power to direct the act of collecting trust fund taxes.
3. Accountability for and authority to pay trust fund taxes.
4. Authority to determine which creditors will or will not be paid.
To determine whether a person has the status, duty and authority to ensure that the trust fund taxes are paid, the IRS considers the duties of the officers as set forth in the corporate by-laws as well as the ability of the individual(s) to sign checks. In addition, the IRS determines the identity of the individuals who:
1. Hire and fire employees.
2. Exercise authority to determine which creditors to pay.
3. Sign and file the employment tax returns.
4. Control payroll/disbursements.
5. Control the corporation’s voting stock.
6. Make federal tax deposits.
Factors to consider as to “responsibility” include;
1. Whether the person had the ability to exercise independent judgement with the financial affairs of the business.
2. If a person is an officer or owns stock in the corporation, this cannot be the sole basis for “responsibility.”
3. If a person has the authority to signs checks, the exercise of that authority does not, in and of itself, establish “responsibility.”
Willfulness
“Willfulness” means intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental. No evil intent or bad motive is required.
To show “willfulness,” the IRS must show that a “responsible” person was aware, or should have been aware, of the outstanding taxes and either intentionally chose not to pay the taxes or was plainly indifferent that the taxes needed to be paid.
A “responsible” person’s failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the TFRP’s “willfulness” element. The payment of of net wages (wages minus the trust fund taxes) to employees when funds are not available to pay withholding taxes is a “willful” failure to collect and pay over under the trust fund taxes.
The payment of wages to employees over the government constitute “willfulness.”
If the IRS can show that you paid other creditors or directed others to pay other creditors after you became aware of the unpaid trust fund taxes, you have met the “willfulness” element for the application of the TFRP.
Again, for the assertion of the TFRP, the IRS must establish that a person is “responsible” and also “willfully” failed to collect or pay over the trust fund taxes to the government. Thus, you would first argue that you are not a “responsible” person; and if that fails, you will argue that you did not “willfully” fail to pay the trust fund taxes. You must keep in mind that the courts have favored the IRS in the application of the TFRP.
If you were the sole shareholder, president and director of your corporation and had check signing authority; the TFRP will be applied against you for the trust fund taxes. You are liable, end of issue.
An escape application
You have a chance to escape the application of the TFRP penalty when the IRS determines that you are a “responsible” person due to one specific factor and nothing more. If the IRS determined that you are a “responsible” person because you had check signing authority and nothing more, you can argue you that you were given check signing authority for the mere convenience of your employer.
You can explain that other individuals also had check signing authority. You will need to show that you had nothing to do with payroll.
You will need to obtain affidavits from other employees of the corporation stating that you had nothing to do with the finances of the corporation.
If the IRS determined that you are a “responsible” person because you were a shareholder of the corporation and nothing more, you can argue that you were a mere investor in the business and not involved in the day to day operation of the business.
You will need to show that you were not on the business premises. Again, you will need to obtain affidavits from the employees of the corporation to collaborate your position.
Responsible person
If the IRS determined that you are a “responsible” person because you were a director of the corporation and nothing more, you can argue that you had nothing to do with the operation of the business. You will need to obtain the corporate records to show when you were the director and what was discussed at the board of director’s meetings.
You will need to show that you were not on the business premises. Again, you will need to obtain affidavits from the employees of the corporation to collaborate your position.
If the IRS determined that you are a “responsible” person because you were related to a “responsible” person and nothing more. You will argue that you had nothing to do with the day to day operation of the business.
Again you will have to obtain affidavits from the employees of the corporation stating that you were not on the business premises and had nothing to do with the day to day operation of the business and not an owner or director of the business.
If the IRS determined that you are “responsible” person because you are a shareholder (but not the sole shareholder), were an employee and had check signing authority; you will need to argue that you had no decision making authority. You will need to describe your duties as an employee and obtain affidavits from other employees that you were not involved in the day to day operations of the business.
If the IRS determines that you are a “responsible” person solely due to one of these factors, stock ownership, check signing authority or employment status; you will need to show that you had no authority over the financial affairs of the corporation. You will need to obtain affidavits from the employees of the corporation to collaborate your position.
If the IRS determines that you are a “responsible” person due to a combination of factors, such as stock ownership, check signing authority or employment status; you will need to show that you had no authority over the financial affairs of the corporation.
You will need to obtain affidavits from the employees of the corporation to collaborate your position. With more factors against you, it will be more difficult for you to prove that you are not a “responsible” person.
Once the IRS has determined that you are a “responsible” person and you can not persuade the IRS that you are not a “responsible” person; you will need to show that you did not “willfully” fail to pay the employment taxes.
If you paid other creditors after you became aware of the unpaid trust fund taxes, you have “willfully” failed to pay the employment taxes.
On the other hand, if you made these payments because you were threatened with physical harm by the owner or director of the corporation, you can argue that you did not “willfully” fail to pay the employment taxes. Again you will need to prove your position with affidavits from the employees of the corporation and a police report to show physical violence.
In conclusion, if you are a non-owner employee of a corporation and do not want to be held liable for the TFRP; as soon as you become aware of the unpaid employment taxes, you need to inform the officers and directors of the corporation in writing of the problem and don’t sign any more corporate checks.
If your are given the choice of either paying other creditors or being fired; the choice is yours with consequences. If you pay the other creditors, you have “willfully” failed to pay the employment taxes.
If the taxes are not paid soon, you resign your position from the corporation and make your resignation in writing.
Further, if you were an officer and/or director of the corporation, you make sure that the public corporate records reflect that you no longer have these positions with the corporation. This may seem harsh, but this is the safest way to save yourself from the TFRP.
Trust Fund Penalty – How to WIN -Trust Fund Penalty Defense – Former IRS
