Certain situations can place an individual at risk of personal assessment for business related taxes, including employment taxes and withheld income taxes. Congress created the Trust Fund Recovery Penalty to discourage misuse of employee’s tax dollars. An employer is technically expected to set aside income taxes along with Social Security and Medicare taxes in trust for the benefit of the government. Ultimately, the employer also pays Social Security and Medicare taxes and submits all taxes to the IRS with the employment tax return. A willful failure to collect or pay over the taxes by a responsible person could result in an assessment of the Trust Fund Recovery Penalty. This penalty equals 100% of the unpaid income tax withheld, plus the employees withheld Social Security and Medicare taxes.
If the business owner is the individual assessed with this penalty, it is important to note that the penalty is a separate assessment from the employment tax of the business. Legally, the IRS could collect both, but as a matter of policy the IRS does not. However, it is entirely possible for the IRS to collect on both debts at the same time, requiring the individual and the business each to come into some form of compliance with a payment agreement or other arrangement. The IRS policy merely means that the IRS will not collect more than the total employment tax owed by the business.
In order for the government to assess this penalty, it must substantiate that a person is both responsible for collecting and paying over the taxes withheld to the government and that the person responsible willfully failed to collect or pay these taxes.
When examining a delinquent business taxpayer, the IRS will look for any and all responsible parties – their analysis does not necessarily focus on a single individual. A responsible person is a person, or group of people, who has 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, or limited liability company
- a member or employee of a partnership
- a corporate director or shareholder
- a limited liability company manager or member
- a member of a board of trustees of a nonprofit organization
- another person with authority and control over funds to direct their disbursement, or
- another corporation or third party payer
As this list indicates, it is not simply the owner of the business that is at risk for assessment.
The IRS describes responsibility as a matter of status, duty, and authority. A determination of responsibility is dependent on the facts and circumstances of each case. A responsible person has:
- A duty to perform
- Power to direct the act of collecting trust fund taxes
- Accountability for and authority to pay trust fund taxes
- Authority to determine which creditors will or will not be paid
The United States Tax Court has ruled that a person can still be held responsible even if he or she has delegated a duty to someone else. And the Court has ruled that a person may be responsible even though he did not know that the withheld taxes were not being paid over to the government.
There are certain factors that the Courts have looked at as indicators that a person is likely a responsible person. Here are some examples:
- Holding the position of an officer or member of the board of directors
- Having a substantial ownership interest in the business
- Having the authority to hire and fire employees
- Managing the day-to-day operations of the business
- Deciding how to disburse funds and pay creditors
- Possessing the authority to sign checks or authorize payments on behalf of the business.
Just because a person is responsible, doesn’t mean that they can be assessed. It is necessary to show that the person acted willfully in failing to collect or pay over the trust fund taxes. Several Courts have ruled that willfulness does not require a criminal or other bad motive. Rather, the Courts have indicated that a voluntary, conscious and intentional failure to collect, truthfully account for, and pay over the taxes withheld from the employees is enough to be deemed willful for this purpose. A responsible person acting with a reckless disregard of a known or obvious risk that trust fund taxes may not be remitted to the Government will be deemed willful. Merely acting negligently however is not enough to meet the required standard of acting willful.
If you are put in the position of potentially being assessed with a trust fund recovery penalty, you should be aware that the proposal to assess you does come with appeal rights. If the IRS employee proposing assessment believes you are responsible and acted willfully, you may administratively appeal this proposal to the Appeals Division of the IRS for review. During the appeals hearing, you have an opportunity to show why you were either not responsible or not willful.
If you lose on appeal, or do not appeal the proposed assessment, the liability is assessed and the IRS will proceed with collection of this debt no differently than any other personal liability.
If you are undergoing evaluation as a proposed responsible person for assessment of a Trust Fund Recovery Penalty, or if you need assistance with the Appeal of a proposed penalty or avoidance of collection action for an assessment of a trust fund penalty, do not hesitate to contact our office for further assistance.