In the current economic climate, many firms are having a hard time paying their bills and some choose to borrow from Uncle Sam by taking employee withholding taxes and using them for operating capital instead of depositing them with the United States Treasury.
IRS takes a very dim view of this unorthodox practice and the interest and penalties can be severe.
Many companies never get current and go under owing IRS unpaid 941 Payroll Tax.
Thus the do-it-yourself "loan" becomes an unpaid debt that the corporation can't pay 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 penalty, interest, or the corporate share of FICA.
The unpaid trust fund may be recouped against these persons upon investigation and determination of liability by an IRS Revenue Officer.
Unfortunately, if the 941 tax is from a sole proprietorship, there is no need for the TFRP.
The owner is 100% liable.
The IRS goes after the 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 over trust fund taxes.
A Trust Fund Recovery Penalty (TFRP) may be proposed on those who are guilty of: 1.
Willful failure to collect tax; 2.
Willful failure to account for and pay over tax; or 3.
Willful attempt in any manner to evade or defeat tax or the payment thereof.
The Trust Fund Recovery Penalty (TFRP) under IRC 6672 is equal to the total amount of tax evaded, not collected, or not accounted for and paid over.
Even a Chapter 7 bankruptcy of the corporation doesn't stop the TFRP.
However, in some cases a Chapter 11 may provide for a repayment plan of the tax and the TFRP not assessed pending resolution.
Once assessed, the TFRP is a priority debt of the individual charged and is generally excepted from discharge in a personal bankruptcy.
The Revenue Officer uses a Form 4180 to conduct interviews with those persons he or she feels can provide reliable information on the operation of the business prior to and during the run-up of the tax debt.
They will secure 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 secured from third parties by issuance of a summons.
So what if you were a lowly 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 you were directed to sign the checks by your boss and your position did not require responsibility for making sure the taxes were paid, you may have a defense against the penalty.
The issues are whether or not one has the status, duty, or authority required to meet a liability determination and willfulness.
The IRS considers precedent when evaluating responsibility.
A major case is the Supreme Court decision in Slodov v.
United States, 436 U.
S.
238, 78-1, USTC 9447 (1978).
The primary defenses to the TFRP are denial of status, duty and authority; or denial of willful conduct in the non-payment.
Other defenses are limited periods of liability (example-I was Controller of WWW for 2 months whereas the tax debt is for the past year); assessment outside the statute of limitations; or that the tax was paid already.
In some cases if you can prove you are broke with no assets or prospects, IRS may choose to not assess the TFRP based on non-collectability.
If you think you have a defense, do not sign the Form 2751 and agree to the tax assessment no matter how much pressure the Revenue Officer puts on you.
File an appeal of the assessment 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 cannot be used, for the purpose of (i) avoiding valid penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter[s] designed to avoid payment of taxes due the United States.
No "covered opinion" under IRS Circular 230 is provided by virtue of this article.