In the current economic climate, many businesses are struggling to pay their bills, and some are choosing to borrow from Uncle Sam by withholding employee taxes and using them as working capital rather than depositing them in the US Treasury. The IRS takes a very negative view of this unorthodox practice and the interest and penalties can be severe. Many businesses never catch up and go under 941 payroll taxes not paid by the IRS. Thus, the do-it-yourself “loan” becomes an unpaid debt that the corporation cannot repay if it is liquidated with no assets to pay Uncle Sam.

When this happens, the corporate protection for shareholders, officers and directors against debts owed to company creditors does not fully apply. However, liability is limited to the trust fund and does not include penalties, interest, or the corporate share of FICA. The unpaid trust fund may be recovered against these individuals upon investigation and determination of liability by an IRS Revenue Officer. Unfortunately, if the 941 is a sole proprietor, there is no need for the TFRP. The owner is 100% responsible.

The IRS goes after 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 to those guilty of:

1. Willful failure to collect taxes;
2. Deliberate failure to account for and pay taxes; Prayed
3. Deliberate attempt in any way to evade or defeat the tax or the payment thereof.

The Trust Fund Recovery Penalty (TFRP) under IRC 6672 is equal to the total amount of taxes evaded, not collected, or not accounted for and paid. Even a Chapter 7 bankruptcy of the corporation does not stop the TFRP. However, in some cases, Chapter 11 may provide for a tax payment plan and the TFRP is not assessed pending resolution. Once assessed, the TFRP is a priority debt of the defendant and is generally exempt from discharge in a personal bankruptcy.

The Revenue Officer uses a Form 4180 to conduct interviews with those persons he believes can provide reliable information about the operation of the business before and during the period before the tax liability. They will get bank signature cards, copies of signed checks, loan applications, etc. during the course of the investigation. If the 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 signed payroll checks? You may or may not be liable depending on the circumstances. If your boss told you to sign the checks and your position did not require the responsibility of making sure the taxes were paid, you may have a defense against the penalty. The issues are whether or not one has the necessary status, duty, or authority to comply with a determination of liability and willfulness. The IRS considers prior 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 the denial of status, duty and authority; or the denial of the fraudulent conduct in the non-payment. Other defenses are limited periods of liability (example: I was controller of WWW for 2 months, while the tax debt is from last year); evaluation outside the prescription period; or that the tax has already been paid. In some cases, if you can prove that you are broke and have no assets or prospects, the IRS may choose not to assess the TFRP based on non-collectibility. 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 review within 60 days. Hire a CPA, Enrolled Agent, or Tax Attorney to help you.

IRS Circular 230 Disclosure: The discussion of U.S. 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 due to the United States. Under this section, no “covered opinion” is provided under IRS Circular 230.