Trust Fund Recovery Penalties
Trust Fund Recovery Penalties can be a potential nightmare for business owners and others who manage a business. They are not dischargeable in bankruptcy and could even lead to criminal charges. In our experience, the typical person who is assessed a trust fund recovery penalty is an honest, well-meaning, law abiding citizen. These people usually face a cash flow issue or business slow down and neglect to pay their business’ payroll taxes in order to make ends meet for their families or to keep their employees gainfully employed. This seems all seems fairly reasonable and innocent. Yet the IRS comes down the hardest on these types of taxpayers.
IRC Section 6672(a) reads” Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for or pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.”
This is commonly known as the 100% penalty. The penalty is assessed for the Trust Funds not paid. Trust funds are the money you withhold from an employee’s paycheck, which includes federal income tax and the employees’ share of FICA and Medicare. This money is held in trust until you pay it to the Internal Revenue Service. You can be personally liable the Trust Fund Recovery Penalty if:
- You are a “responsible” person and
- You acted “willfully.”
Who is a responsible person?
According to the IRS, a responsible person is a person or group of people who have the duty to perform and the power to direct the collecting, accounting and paying of trust funds. This person may be:
- an officer or 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, or
- another person with the authority and control to direct the disbursement of funds.
In many closely held family businesses, there is little doubt as to who the responsible people are. However, it is not always cut and dry whether a person is responsible. In some businesses, there may be doubt as to whether some managers, executives, or board members have truly have the authority to direct business affairs. The IRS typically targets business owners, and high ranking business managers for the Trust Fund Recovery penalty. It may also target anybody whose name appears on a bank signature card for the business.
According to the IRS, for willfulness to exist, the responsible person must:
- Have known about the unpaid taxes; and
- Have used the funds to keep the business going or allowed available funds to be paid to other creditors.
This requirement does not necessarily require a person to do something reckless or fraudulent with the trust fund moneys. For example, a responsible person that uses the trust fund moneys to pay rent for the business or pay employees’ salaries can be liabile. A responsible person that uses trust fund moneys to pay for life saving medical treatments could be liable to. All that is required is that the person knew about the tax liability and directed money to pay anybody instead of the IRS. The issues presented in determining who the responsible person is and whether or not willfulness exists depends upon the facts and circumstances in each case. If the taxes are not paid, the IRS will be looking for someone to penalize. It may be you.
If the IRS is planning to assess the Trust Fund Recovery Penalty against you, or if they have already assessed the penalty against you:
- Do you know what are your rights are?
- Are you the person who should be assessed, or is it someone else?
- Do you know if you have been assessed the proper amount of “Trust Funds”?
- Will you qualify for an “Offer in Compromise”?
- Can you qualify to make installment payments?
- Will you lose your home, your bank account, your car or your life savings?
If you have any questions or if we can further assist you, please contact us. We have offices throughout Southern California.
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