Payroll and Trust Fund Penalties
Proven Tax Lawyers Ready to Help Save Your Business
Within each business, there is a person responsible for handling the company's tax liabilities with the Internal Revenue Service (IRS). This will involve everything from withholding to depositing or paying certain taxes, and more. This person can be an officer in the company, partner, sole proprietor, or an employee. Should this person intentionally fail to pay what the company owes in tax obligations, they can be held personally responsible for a trust fund recovery penalty by the IRS.
Find out how to handle a trust fund recovery penalty or avoid this serious complication in the first place. Contact the tax law attorneys at Pearson Butler for a confidential consultation.
Trust Fund Taxes
These taxes are categorized as trust fund taxes because the money is held in a trust until the tax money is turned over to the government. A person may be assessed a trust fund recovery penalty if the taxes from a company are not able to be immediately paid by a company when due. Even if a company has ceased operations, this penalty can still be assessed to an individual.
Prior to a penalty being issued, the IRS may conduct an interview as part of their investigation. This is usually conducted by an IRS revenue officer. The goal is to determine the exact duties and responsibilities of a person within a company. A person's ability to use independent judgment regarding the company's financial affairs is what will determine responsibility. An employee simply following a superior's instructions is not considered responsible.
IRS Form 4180
This is the form used by an IRS Revenue Officer to conduct interviews. An experienced Utah tax defense attorney will know how to properly fill out IRS form 4180. It can then be returned to the IRS Revenue Officer without an interview having been conducted. IRS guidelines make it necessary for the IRS Revenue Officer to perform interviews in-person. There are many who will are satisfied with a properly completed IRS Form 4180 sent to them by mail. When this is done correctly, the required interview process can be waived. It's important to provide a variety of supplemental written statements. This can illustrate details the form does not require.
The IRS will seek banking information during an investigation. It will want to see bank signature cards as well as a company’s canceled checks. This information is usually obtained by the IRS from a summons issued directly to a specific bank. The IRS believes having signature authority for a company's checking account establishes a person's ability to make independent financial decisions. A signature on a company's check or having authorization on a bank card is enough reason to begin investigating someone.
When the IRS determines that an individual is the responsible party and issues a Trust Fund Recovery Penalty (TFRP), they will provide a Letter 1153 with the details of the penalty. The person receiving this letter has 60 days from the date of the letter 1153 to appeal the penalty assessment.
The TFRP may be assessed against any person who:
- Is responsible for collecting or paying withheld income and employment taxes;
- Or for paying collected excise taxes; and
- Willfully fails to collect or pay them.
A responsible person is an individual or group of people with the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:
- An officer or an employee of a corporation;
- A member or employee of a partnership;
- A corporate director or shareholder;
- Another corporation or third-party payer;
- Another person with authority and control over funds to direct their disbursement;
- Payroll Service Providers (PSP) or responsible parties within a PSP;
- Professional Employer Organizations (PEO) or responsible parties within a PEO; or
- Responsible parties within the common law employer (client of PSP/PEO).
- A member of a board of trustees of a nonprofit organization;
For willfulness to exist, the responsible person:
- 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).
If a person resides outside the United States, they have up to 75 days from the date of the 1153 letter to appeal. The IRS letter will also contain information on a person's right to appeal. Should an individual not respond to the TFRP letter, the IRS will then send them a Notice of Demand for Payment. Once the penalty is assessed, the IRS can then proceed with collection actions against an individual's personal assets.
Should a company not agree with the findings of the IRS investigation, they can send a protest letter. This letter should be handled by an experienced tax defense attorney. It needs to be drafted and sent directly to the IRS revenue officer handling the case. The protest letter needs to provide details as to why the TFRP should not be assessed. It can explain why the conclusions of the IRS revenue officer was not correct. If the IRS agrees with the protest letter, they can rescind the Letter 1153 that was sent. This does not normally happen. Protest letters are usually forwarded to an IRS appeals officer. They will carefully review the details of the case. If the case cannot be resolved during the appeal process, it will then be decided in a U.S. District Court. If a settlement is offered, the amount is based on the costs and merit of taking the case to court.
A person at a company being investigated for a TFRP may be asked by the investigating IRS revenue officer to complete a 433-A financial statement. A qualified Utah tax defense lawyer can remind the IRS revenue officer that completion of a 433-A financial statement is not required prior to the completion of an investigation and assignment of liability. The IRS has not been very successful in collecting TFRPs. A report from an IRS taxpayer advocate group estimates that approximately 86% of all TFRPs are not collected after the IRS investigation is complete.
For experienced legal help, contact Pearson Butler by calling (800) 265-2314. Our office is located in South Jordan and serves all of Utah.