In the current economic climate, many companies are having a hard time paying their bills and some are choosing to borrow from Uncle Sam by taking employee tax withholdings and using them as working capital rather than depositing them in the United States Treasury. The IRS looks down on this unorthodox practice and the interest and penalties can be severe. Many companies never catch up and do not have to pay IRS payroll tax 941. Thus, the DIY “loan” becomes an unpaid debt that the corporation cannot pay if it is liquidated with no assets to pay Uncle Sam.
When this happens, corporate protection for shareholders, officers and directors against debts to the company’s creditors does not fully apply. However, liability is limited to the trust fund and does not include penalties, interest, or FICA’s corporate involvement. The unpaid trust fund can be recovered against these individuals upon investigation and determination of liability by an IRS revenue officer. Unfortunately, if the 941 tax comes from a sole proprietorship, the TFRP is not required. The owner is 100% responsible.
The IRS pursues corporate officers and directors or other “responsible persons” under IRC 6672. A “responsible person” is one who has the duty to perform or the power to direct the act of collecting, accounting for, or paying the trust fund. taxes. A Trust Fund Recovery Penalty (TFRP) may be proposed for those who are guilty of:
1. Willful failure to collect taxes;
2. Willful failure to render accounts and pay taxes; gold
3. Deliberate attempt in any way to evade or void taxes or payment thereof.
The Trust Fund Recovery Penalty (TFRP) under IRC 6672 is equal to the total amount of taxes evaded, uncollected, or unaccounted for and paid. Even a Chapter 7 bankruptcy of the corporation does not stop the TFRP. However, in some cases, a Chapter 11 may provide a tax payment plan and the pending untested TFRP for resolution. Once assessed, the TFRP is a priority debt of the accused person and is generally exempted from discharge in the event of personal bankruptcy.
The Revenue Officer uses a Form 4180 to conduct interviews with those who he believes can provide reliable information on the operation of the business before and during the period of execution of the tax debt. They will secure bank signature cards, copies of signed checks, loan applications, etc. during the course of the investigation. If documents are not provided, they can be obtained from third parties by issuing a subpoena.
So what if you were a humble secretary at Worldwide Wonderful Widgets LLC when they went under but you wrote payroll checks? May or may not be liable depending on the circumstances. If your boss directed you to sign the checks and your position did not require the responsibility of making sure taxes were paid, you may have a defense against the fine. The issues are whether one has the status, duty, or authority required to comply with a determination of responsibility and the will. The IRS considers a precedent when assessing liability. An important case is the Supreme Court decision in Slodov v. United States, 436 US 238, 78-1, USTC 9447 (1978).
The main defenses of the TFRP are denial of status, duty and authority; or denial of intentional conduct in default. Other defenses are limited periods of liability (for example, I was Controller of WWW for 2 months while the tax debt is for last year); evaluation outside the statute of limitations; or that the tax has already been paid. In some cases, if you can show that you are bankrupt and have no assets or prospects, the IRS may choose not to assess the TFRP based on inability to collect. If you think you have a defense, do not sign Form 2751 and accept the tax assessment no matter how much pressure the Revenue Officer puts on you. File an appeal of the evaluation within 60 days. Hire a CPA, enrolled agent, or tax attorney to help you.
IRS Circular 230 Disclosure: The discussion of US federal tax matters contained in this article is not intended or written to be used, and may not be used, for the purpose of (i) avoiding valid penalties under the Internal Revenue Code or (ii) promote, market or recommend to another party any transaction or matter related to taxes[s] designed to avoid paying taxes owed to the United States. Under this article, no “covered opinion” is provided under IRS Circular 230.