September 22, 2023

Epic Law

The Law Folks

Trust Fund Penalty – Payroll Taxes – Who Is Responsible?

With many companies going out of business today, some owners and officers are completely unaware that the IRS can collect the taxes that were owed by the corporation from the responsible corporate parties. This conversion from corporate to individuals is called the trust-fund penalty. It falls under 6672 of the Internal Revenue Code.

A trust fund recovery case begins with unpaid 941 payroll taxes from a corporation. After some period of time, the IRS computer catches up with the unpaid 941’s on corporate cases. These cases are always sent to the field for an examination of the trust fund recovery penalty.

After a series of notices are sent out to the corporation, the case eventually works its way out to the field where an IRS Revenue Officer is assigned the case. After the Revenue Officer goes through necessary office checks, a field call is usually set up to visit the taxpayer at their place of business. After the visit the Revenue Officer will normally make demand for the tax to be paid in full or work out some sort of payment plan. In most of these cases payment cannot be made in full to pay the IRS tax liability. In these situations, the Revenue Officer normally makes a decision that the best way to secure the governments interest is to make sure that the corporate officers who are responsible for paying the tax are set up with an individual liability to pay these 941 taxes. This is called setting up the trust fund liability.

These assessments become linked with the individuals. The assessments are made as though you would owe personal income tax. The code section that deals with this administrative procedure is Section 6672. Multiple individuals may be set up as responsible parties.

The revenue officer goes through a number of items to determine who is responsible. After 10 years on the job, it does not take a long time for the IRS Agent to figure this out. It is usually obvious who the responsible parties are. Below are some of the check lists used.

Step#1 – Find out who is responsible to follow the money. That is, who signed checks and who benefited from profits. The Internal Revenue Service is looking for who controlled the money. The IRS can ask the company to cooperate by asking for checks to review signatures. Or, the IRS can directly summons the bank to see who is on the bank signature cards and who signed the majority of the business checks. This usually points them in the right direction.

Step #2 – Who signed the 941’s, who is responsible for the preparation and signing of the tax forms? Anyone in the chain of events that had knowledge or authority may be held liable by the IRS. The fear of the IRS agent asking company staff questions can be very unnerving and the IRS agents on these types of cases are trained to get to the truth.

Step #3 – Who is really in charge? At the end of the day, someone is the decision maker. Who really is that? Find out who really controlled the operations of the company.

Step#4 – Who has the right to hire and fire? Whoever had this responsibility had a lot of influence in the company.

Step#5 – Who had the right to determine financial policy? In other words, who talked with the bank? The bank knows the true officers of the said corporation.

Step#6 – Who has the right to authorize all bills and pay other creditors? When you get to this point it starts to get real obvious who the responsible officers are.

Step#7 – Who had the right to open and close the bank accounts? Only the true officers of the corporation had this authority.

Step#8 – Who guaranteed or co-signed loans? Only someone who had a true vested interest in the company would want to do this.

Step#9 – Who authorized payroll? Even though this can be delegated to anyone, usually the responsible person has an interest in this function.

Step #10 – Who could sign the corporation tax return? This is true evidence of responsibility.

If the IRS does not find out who is responsible after this process, they will ask the neighboring businesses or the landlord. Usually, they all come up with the same person. By the way, whoever signed the lease, is usually a good choice. Another thing the IRS agent uses are the corporate resolutions found at the bank. The IRS also uses a Form 4180 which is a collection interview form that contains several pages of questions. Upon completion, the agent can make the determination easily.

As a former agent, everyone wants to blame the other person, a real who done-it. It is always someone elses fault. A key tip for persons that might be reading this is that if you are in trouble or heading that way, contact a professional to represent you. We at Fresh Start Tax are experienced in these types of IRS Cases. Another tip is if you are making tax payments, write on each check to the IRS, “monies to be applied to trust-fund only.” If you do that, each payment will be applied to the trust fund tax and not go to penalties and interest. A final tip, if you do not like the revenue officer’s findings, you can always take your case to appeals.