Trust Fund Tax Penalty Chapter 3
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Trust Fund Penalty, IRS CODE 6672, Civil Penalty (These titles refer to the same thing)
Any time a company owes payroll taxes (withholding, social security, and Medicare that is taken out of the employees paycheck), the liability can extend to any and all responsible parties. When corporations or legal liability companies, (not general partnerships, or sole proprietorships) owe payroll, only the trust fund can be charged to a responsible party. The trust fund can be significantly less than the total owed by the company. The trust fund consists of the federal withholding, social security (FICA), and Medicare tax that is remaining as unpaid after the IRS takes into consideration the payments that are made and applied to each quarter. The remaining unpaid trust fund gets charged to each responsible party that the IRS feels owes the tax.
You owe the trust fund when you take part in the decision making process for the company funds. Do you help decide who gets paid and who doesn’t get paid? Do you sign the checks? The IRS would have you believe that you are liable for the trust fund if you are a signature authority on the company bank account, or if you signed checks, or if you are a stockholder, or if you signed tax reports. The law however, states that if you sign checks as a convenience for the employer, and you do it only when you are told to do so, and you don’t have any authority to decide who to pay, when and how much, proving this should get you out of the liability. However, the IRS knows that anyone can say that, so you need further evidence such as notarized statements from people you worked side by side with, who can testify that they never saw you make such decisions. Professional help may be needed here. Testimony from the actual people liable, such as the owner is good too. Your statements should never be in conflict with statements made by other potentially liable people.
Why is this significant? Because of the legal entity concept and other rules, the IRS can only look to the assets of the company for payment of the full debt. If the company doesn’t have any assets or minimal value (approx. ,100. forced sale value), they can only collect the remaining trust fund from the responsible parties.
If you are about to be assessed a trust fund from a company and you are not liable, you must attempt to prove this to the collection personnel as soon as possible. They are required to fill out an IRS form 4180 interview before they determine who is liable. This is where they collect evidence to determine who is liable for the trust fund. It is to your advantage to meet with the collection officer or discuss with ACS your position, so you can sway that person to your way of believing. Just answer the questions as briefly as possible. Do not volunteer additional information. Obtain a copy of form 4180 first from the internet, so you know what questions you we be answering. This way you won’t be caught off guard. If you can’t convince them that you don’t owe the tax you will have to prepare an appeal. See the appeals chapter. If you don’t appeal this action, and the trust fund is charged to you, it will be treated as a tax you owe under your social security number. There is little restriction as to what the IRS can levy or seize to satisfy collecting this debt. The trust fund debt will be treated like a debt from your personal tax return Form 1040.
This debt will be forgiven as part of an offer in compromise or if the SOL period on collections expires. A bankruptcy won’t get rid of the trust fund liability, not even a chapter 7 complete bankruptcy. During my career I had several attorneys question the fact that the SOL applies to trust fund. They erroneously felt that it didn’t because a bankruptcy couldn’t discharge it. Make no mistake, I have had trust fund removed from my client’s record of account when the stature ran out. Sometimes the IRS will not be up front with you about this, and try to get you to pay after the statute runs out. Don’t fall for it. I once had a collection manager back date a levy so that it conformed to the SOL . My client was so mad, thinking that I was wrong, that when I told him to go to the taxpayer’s advocate to fight it, he didn’t believe me. The IRS is very good at convincing taxpayers to give up their rights and not believe their advisors. It will do you good to look up the rules yourself, if you are ever having doubts about the advice you are following. Anytime you want more technical information, you could buy a book, or look up the IRS version on their website.
When you want to test the IRS’s calculation of the actual trust fund owed, you need to request the Form 4183 and check how the actual payments toward the trust fund were applied. Get copies of the record of account for each period they say you owe. Make sure you know how much money and when each payment was made. Compare this to the Form 4183 and make sure the payments were included and offset against the actual tax. I have seen many cases where the IRS has filed a 6020B and did not accept the actual late return, thereby inflating the trust fund. I have found errors in the trust fund calculation when late payments were treated as future payments and applied more toward the non trust fund, leaving a greater trust fund balance.
If you are one of the owners of the company, you should consider if it is best to pay the taxes or to liquidate and just pay the trust fund. If you are considering doing this, please call my office to discuss what I can do to save you the most money. The money you save is always way more than my fees. I do this each month for clients. I help them set up another company, so they can pay only the trust fund, and operate a company free and clear of any IRS tax debt. You must meet certain qualifications for this. I do not recommend you trying this tactic on your own.