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Trust Fund Penalty

Congress enacted the Trust Fund Recovery Penalty Statute to encourage prompt payment of withheld and other collected payroll taxes by allowing the Internal Revenue Service to assert a liability against responsible third parties [IRC 6672]. The amount of the penalty imposed by the statute for failure to comply with its provisions is measured by the payroll taxes required to be collected or collected and not paid over. That is why the liability is referred to as a "100% Penalty." The penalty is civil in nature, not criminal.

Requirements For Liability

There are two major tests to determine if someone is subject to the provisions of IRC 6672. They are primarily questions of fact and may be stated as follows:

  1. Whether the party against whom the penalty is proposed had the duty to account for payroll taxes, collect payroll taxes, and turn over trust fund payroll taxes, including:
    • an officer
    • 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, and
  2. Whether he or she willful failed to perform this duty relating to the trust fund payroll taxes.
    • 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).
    • Used available funds to pay other creditors when the business was unable to pay the employment taxes is an indication of willfulness.

In general, the IRS has the right to pursue any person who, meets the tests, even if he was not an officer or employee of the corporation which originally collected the payroll tax problem. The penalty can be assessed against more than one person. It is not unusual for the IRS to assess the penalty for payroll tax problem against several responsible persons. In the event that the IRS assesses several persons for trust fund payroll taxes, it may collect the entire liability from any of those persons.

 

 

Defenses to assertion of the Trust Fund Penalty!

TAXAID.us will review the most common defense to IRC 6672 liability, which is that the taxpayer at issue does not have the Requisite Authority or Intent to be classified as a responsible person. Where applicable, TAXAID.us will raise the following defenses on your behalf:

  1. Lack of Sufficient Authority
  2. Resignation
  3. Lack of Knowledge
  4. Delegation of Authority
  5. Directions From Others
  6. Final Word
  7. Defending the Subordinate Employee
  8. Reasonable Cause
  9. Equitable Defense Where Government's Conduct Prevents Collection of Trust Fund Taxes
  10. Statute of Limitations
  11. Previous Negotiations with IRS
  12. Alcoholism, Drug Addiction and Physical Illness
  13. Section 3509 Relief for Employer Negates Willfulness Under 6672

Where the above-mentioned defenses do not apply and the IRS determines that you are a responsible person, the IRS will provide you a letter stating that it plans to assess the Trust Fund Recovery Penalty against you. You have 60 days after the date of the letter to appeal the determination by filing a Tax Protest. Your case would then be assigned to an Appeals Officer for review. If you do nothing or fail to timely file a Tax Protest, the IRS will assess the penalty against you and send you a Notice and Demand for Payment. Thereafter, the IRS can take collection action against your personal assets including filing a federal tax lien or taking levy or seizure action.

TAXAID.us can advise you of the best course of action to deal with the assessment of the Trust Fund Recovery Penalty and how best to settle this liability. For many taxpayers, this typically leads to an Offer in Compromise.

 

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