- Tax Controversy and Litigation
Tax and Estate Planning
- Tax Controversy and Litigation
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What Are “Trust Taxes”?
“Trust taxes” are those that are collected or withheld taxes that are imposed on person(s) other than the party who collects, accounts for, and pays over such taxes.
For example, IRC § 7501 provides that:
Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States. The amount of such fund shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations (including penalties) as are applicable with respect to the taxes from which such fund arose.
Why Should I Care about Trust Taxes?
In short, personal liability. The Trust Fund Recovery Penalty, “TFRP,” “Civil Penalty,” 100% Penalty, or 6672 Penalty is the IRS’s ability to pierce the veil of limited liability of a corporation or LLC.
Under the law a person can be personally liable for a portion of unpaid payroll taxes. Specifically, IRC § 6672 provides that:
How Much is the Trust Fund Recovery Penalty?
May taxpayers hear “penalty” and believe that the trust fund recovery penalty is an amount in addition to the unpaid payroll taxes. This is incorrect, as the trust fund recovery penalty is the personal assessment of a certain portion of the total unpaid payroll taxes, specifically the amount of the unpaid balance of the trust fund tax. The penalty is computed based on:
The amount that can be personally assessed generally does not include late filing or late payment penalties, or even interest against the employer; however, interest will accrue on the personally assessed amounts.
Are there State Alternatives?
Yes. California has comparable trust fund recovery penalties for both state payroll taxes and state sales taxes.
For the EDD and California payroll taxes, California Unemployment Insurance Code § 1735 provides that:
Any officer, major stockholder, or other person, having charge of the affairs of a corporate, association, registered limited liability partnership or foreign limited liability partnership, or limited liability company employing unit, who willfully fails to pay contributions required by this division or withholdings required by Division 6 (commencing with Section 13000) on the date on which they become delinquent, shall be personally liable for the amount of the contributions, withholdings, penalties, and interest due and unpaid by such employing unit. The director may assess such officer, stockholder, or other person for the amount of such contributions, withholdings, penalties, and interest. The provisions of Article 8 (commencing with Section 1126) and Article 9 (commencing with Section 1176) of Chapter 4 of Part 1 apply to assessments made pursuant to this section. Sections 1221, 1222, 1223, and 1224 shall apply to assessments made pursuant to this section. With respect to such officer, stockholder, or other person, the director shall have all the collection remedies set forth in this chapter.
The the BOE and California sales taxes, California Revenue & Taxation Code § 6829 provides that:
(a) Upon the termination, dissolution, or abandonment of the business of a corporation, partnership, limited partnership, limited liability partnership, or limited liability company, any officer, member, manager, partner, or other person having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax, or who is under a duty to act for the corporation, partnership, limited partnership, limited liability partnership, or limited liability company in complying with any requirement of this part, shall, notwithstanding any provision in the Corporations Code to the contrary, be personally liable for any unpaid taxes and interest and penalties on those taxes, if the officer, member, manager, partner, or other person willfully fails to pay or to cause to be paid any taxes due from the corporation, partnership, limited partnership, limited liability partnership, or limited liability company pursuant to this part.
How Do I Become Liable for the Trust Fund Recovery Penalty?
Generally speaking the government must prove 2 elements to find you personally liable for the trust fund recovery penalty:
1. Responsibility2. Willfulness
How Does the IRS Investigate and Assess Civil Liability under IRC § 6672?
The investigation of the trust fund recovery penalty is generally conducted by an IRS Revenue Officer. Two of the common techniques used include summonsing bank records and conducting a “4180 Interview.” During the 4180 Interview, the Revenue Officer will ask the target certain questions like:
- Did individual(s) determine financial policy for business, and if so, from what dates?
- Did individual(s) direct or authorize payments of bills/creditors, and if so, from what dates?
- Did individual(s) prepare, review, sign, or authorize transmit payroll tax returns, and if so, from what dates?
- Did individual(s) authorize payroll, and if so, from what dates?
- Did individual(s) authorize or make Federal Tax Deposits, and if so, from what dates?
- Did individual(s) authorize the assignment of any EFTPS or electronic banking PINS/passwords, and if so, from what dates?
- Did individual(s) have authority or PIN assignment on bank accounts?
- During the time the delinquent taxes were increasing, or at any time thereafter, were any financial obligations of the business paid (such as rent, mortgages, utilities, vehicle or equipment loans, or payments to vendors)?
- Were all or a portion of the payrolls met?
- Did any person or organization provide funds to pay net corporate payroll?
- When and how did the individual(s) become aware of the unpaid taxes?
- What actions did the individual(s) attempt to see that the taxes were paid?
- Were discussions ever held by stockholders, officers, or other interested parties regarding nonpayment of the taxes?
- Who handled IRS contacts such as phone calls, correspondence, or visits by IRS personnel?
After the investigation, but before the trust fund recovery penalty can be assessed, a taxpayers must be mailed or hand delivered a 60-Day Notice of Proposed Assessment, Letter 1153(DO), which advises taxpayers of the proposed penalty and of their appeal rights.
Can I Appeal a Proposed Trust Fund Recovery Penalty?
Yes. Generally speaking if there are both pre-assessment, Fast Track Mediation, and post-assessment appeal rights.
Taxpayers need to be aware of certain unique rules related to post-assessment appeals, because as a general rule, a taxpayer must pay his or her full tax liability before filing suit in federal court.
There is, however, an exception to this general rule when a penalty is a “divisible tax,” one example of which is a § 6672 assessment arising from an employer’s failure to remit withholding taxes for a group of employees. This exception to the full-payment rule derives from the premise that a § 6672 assessment is a “cumulation of separable assessments for each employee from whom taxes were withheld.” Boynton v. U.S., 566 F.2d 50, 51 (9th Cir.1977). Accordingly, the payment of one employee’s withholding tax satisfies the full-payment rule for that employee. This one employee essentially serves as a “test case” by enabling employers “to seek resolution of an employment tax dispute … without the necessity of paying up front the entire amount at issue.” Dixon v. Commissioner, 141 T.C. 3 (2013).
Interested in Learning More?
If you are interested in learning more about the IRS’s Trust Fund Recovery Penalty, or have received a 1153(DO) letter, please feel free to contact us today for a free consultation.