Defending Yourself in an IRS Trust Fund Recovery Penalty Assessment Controversy

In the current economic climate, many firms are havingprovide reliable information on the operation of the
a hard time paying their bills and some choose tobusiness prior to and during the run-up of the tax debt.
borrow from Uncle Sam by taking employeeThey will secure bank signature cards, copies of
withholding taxes and using them for operating capitalsigned checks, loan applications etc during the course
instead of depositing them with the United Statesof the investigation. If the documents are not provided,
Treasury. IRS takes a very dim view of thisthey can be secured from third parties by issuance of
unorthodox practice and the interest and penalties cana summons.
be severe. Many companies never get current and goSo what if you were a lowly secretary at Worldwide
under owing IRS unpaid 941 Payroll Tax. Thus theWonderful Widgets LLC when they went under but
do-it-yourself "loan" becomes an unpaid debt that theyou signed payroll checks? You may or may not be
corporation can't pay if it is liquidated with no assets toliable depending on the circumstances. If you were
pay Uncle Sam.directed to sign the checks by your boss and your
When this happens, the corporate protection forposition did not require responsibility for making sure
shareholders, officers, and directors against debtsthe taxes were paid, you may have a defense against
owed to company creditors does not fully apply.the penalty. The issues are whether or not one has
However, liability is limited to the trust fund and doesthe status, duty, or authority required to meet a liability
not include penalty, interest, or the corporate share ofdetermination and willfulness. The IRS considers
FICA. The unpaid trust fund may be recouped againstprecedent when evaluating responsibility. A major case
these persons upon investigation and determination ofis the Supreme Court decision in Slodov v. United
liability by an IRS Revenue Officer. Unfortunately, if theStates, 436 U.S. 238, 78-1, USTC 9447 (1978).
941 tax is from a sole proprietorship, there is no needThe primary defenses to the TFRP are denial of
for the TFRP. The owner is 100% liable.status, duty and authority; or denial of willful conduct in
The IRS goes after the corporate officers andthe non-payment. Other defenses are limited periods
directors or other "responsible persons" under IRCof liability (example-I was Controller of WWW for 2
6672. A "responsible person" is one who has the dutymonths whereas the tax debt is for the past year);
to perform or the power to direct the act of collecting,assessment outside the statute of limitations; or that
accounting for, or paying over trust fund taxes. Athe tax was paid already. In some cases if you can
Trust Fund Recovery Penalty (TFRP) may beprove you are broke with no assets or prospects, IRS
proposed on those who are guilty of:may choose to not assess the TFRP based on
1. Willful failure to collect tax;non-collectability. If you think you have a defense, do
2. Willful failure to account for and pay over tax; ornot sign the Form 2751 and agree to the tax
3. Willful attempt in any manner to evade or defeatassessment no matter how much pressure the
tax or the payment thereof.Revenue Officer puts on you. File an appeal of the
The Trust Fund Recovery Penalty (TFRP) under IRCassessment within 60 days. Hire a CPA, Enrolled
6672 is equal to the total amount of tax evaded, notAgent, or Tax Attorney to help you.
collected, or not accounted for and paid over. Even aIRS Circular 230 Disclosure: The discussion of U.S.
Chapter 7 bankruptcy of the corporation doesn't stopfederal tax matters contained in this article is not
the TFRP. However, in some cases a Chapter 11 mayintended or written to be used, and cannot be used, for
provide for a repayment plan of the tax and the TFRPthe purpose of (i) avoiding valid penalties under the
not assessed pending resolution. Once assessed, theInternal Revenue Code or (ii) promoting, marketing or
TFRP is a priority debt of the individual charged and isrecommending to another party any transaction or
generally excepted from discharge in a personaltax-related matter[s] designed to avoid payment of
bankruptcy.taxes due the United States. No "covered opinion"
The Revenue Officer uses a Form 4180 to conductunder IRS Circular 230 is provided by virtue of this
interviews with those persons he or she feels canarticle.