The income and social security taxes
an employer withholds from the wages
of employees are called "trust fund" taxes
because they are in theory held in trust
for the government. But when business
owners encounter financial trouble, they
sometimes fail to pay these withheld
taxes - - not because of any plan to "steal" the
money from the government, but because
you just can't pay money you don't have.
The intention is to catch up on the payroll
taxes when there is enough money to do
so. But often this turns out to be an
unfulfilled hope.
The IRS is very aggressive in pursuing
unpaid payroll taxes. The Service is
quite willing to prosecute those who
willfully fail to file payroll tax returns,
or to pay payroll taxes. But more often
the IRS seeks to collect the unpaid taxes
from anyone who had anything to do with
running the company, particularly those
who made the financial decisions or handled
the books or signed the checks.
This is done by assessing the "trust
fund recovery penalty," or TFRP. Corporate
officers, directors, stockholders and
employees are normally protected from
personal liability for the debts of their
corporations. But the TFRP is assessed
directly against the so-called "responsible
persons" in their individual capacity,
piercing the corporate veil.
This is a particularly difficult problem.
The amounts are often huge. And unlike
income taxes, the TFRP is not dischargeable
in bankruptcy. Every entrepreneur who
starts a business believes it will succeed.
The reality, however, is that small businesses
frequently fail. When that happens, most
debts can be left to die with the corporate
shell of the defunct business, and the
entrepreneur can live to fight another
day. But the TFRP can thwart any efforts
to rebuild and start over after the demise
of a failed business, and thus must be
resolved, often through an offer in compromise.
Often the IRS assesses the TFRP, or
threatens to assess it, against not just
the owners of the business, but also
its accountants or bookkeepers or clerical
staff, particularly if they had authority
to sign checks. Although not supported
by the law, many IRS Revenue Officers
simply assert the penalty against anyone
who signed checks or had the authority
to sign checks. As a result, we are often
called upon to protest the assertion
of the penalty against accounting clerks,
folks who are named as officers merely
for the convenience of the person who
really runs the business, the spouses
of business owners, or those who really
are officers or key employees but who
have duties completely unrelated to the
financial management of the business.
We have handled many of these cases,
and can vigorously defend you against
the assertion of the penalty.
In other cases, we are retained to get
the TFRP removed months or years after
it is assessed. This can happen when
a lien filed long ago prevents the sale
of a house, or when the IRS threatens
to commence enforced collection action.
The penalty can be challenged by paying
the amount of withheld taxes for one
employee for a single withholding tax
quarter, and then filing a refund claim.
The Service often agrees and removes
the penalty. But a denial of the refund
claim gives us access to the appeals
process, and if necessary, to court.
If you would like assistance contesting
a threatened or previously assessed TFRP,
please contact us by telephone or email.
WANT MORE INFORMATION?
The Trust Fund Recovery Penalty,
published by the Maryland Society of
Accountants in "The Freestate Accountant," as
part of Mr. Haynes' series on "Dealing
with the IRS Collection Divison."
Internal
Revenue Manual Trust Fund Compliance
Handbook
