Payroll Taxes and Trust Fund Recovery
- Have you received notices from the IRS informing you that they have not received your 941 payroll returns?
- Have you been unable to pay your payroll taxes or are you making payments on old taxes?
- Did you forget to file your payroll returns?
- Didn't file your payroll returns because you couldn't afford to pay the taxes due?
- Is the IRS threatening to levy your bank account or close your business?
- Has the IRS recently proposed a "Trust Fund Recovery Penalty" assessment against you as the responsible person?
- If you are making payments to the IRS on previous payroll taxes, are you making the right type of payment?
- Will you qualify for an offer in compromise or an
Don't wait. Contact us now. We can help. If you continue to ignore the problem, it
will only get worse; much worse. If you wait too long, you can lose your rights to challenge the tax assessment.
If you received a certified letter from the IRS, CONTACT US IMMEDIATELY.
The IRS continues to use Enforced Collection when it comes to unpaid payroll taxes and unfiled payroll returns.
Enforced Collection can include a levy on the assets of the business, including the accounts receivable, equipment, automobiles
and the bank account. The IRS can also close a business for non-payment of payroll taxes. If the business is closed or
files for bankruptcy protection, the IRS will look to the owner of the business for collection of the penalties,
interest, taxes and trust funds. In the case of a corporation or a partnership, the IRS will look to the person responsible
for paying the payroll taxes to collect the trust funds. This is known as the Trust Fund Recovery Penalty.
CI Chief Mark Mathews, ( Tax Talk Today, January 22, 2002) said the IRS, Criminal Investigation Division is shifting
its focus from drug crimes and money laundering to traditional tax crimes involving abusive trusts, employment taxes,
nonfilers, and return preparers.
"Employment tax investigations are up 75 percent", Mathews said. "CI has seen an upswing in employee leasing
schemes and nonpayment of payroll taxes in the last 18 months. CI is interested in egregious cases involving badges of
fraud, rather than nonpayment cases where employers are short of funds and decides to pay other creditors instead of the IRS.
The issue is whether the funds were used to keep a business afloat or to line the employer's pockets."
For many businesses, when they start to have financial problems one of the first things to happen is the payroll taxes are
not paid on time and the payroll returns are not filed on time. Both of these are among the worst things to do when a business
has fallen upon hard times.
Failure to Pay Payroll Taxes on Time
When a business fails to pay the payroll taxes on time, penalties and interest start to accrue. This causes additional cash
flow problems for the business when cash is such an important commodity.
Late Filing of Payroll Returns
If the payroll returns are not filed on time the penalties are substantially increased. Failure to file a return on time can
incur penalties of 5% per month to a maximum of 25%. Add that to other penalties, along with the compounded interest and you can
have a very serious tax problem.
Trust Fund Recovery Penalty
IRC Section 6672(a): Any person required to collect, truthfully account for, and pay over any tax imposed by this
title who willfully fails to collect such tax, or truthfully account for or pay over such tax, or willfully
attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties
provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for
and paid over.
This is commonly known as the 100% penalty. The penalty is assessed for the Trust Funds not paid. Trust funds are
the money you withhold from an employee's paycheck, which includes federal income tax and the employees' share of FICA and
Medicare. This money is held in trust until you pay it to the Internal Revenue Service.
- Are you the "responsible" person?
- Did you "willfully" fail to collect or pay over such tax?
- Did you have knowledge that the payroll taxes were unpaid?
- Did you have the power to control payments to creditors or the IRS?
- Did you prepare or sign the 941 returns?
Who is a responsible person? It may be the person who has the power to direct the collection of trust funds, the power
and authority to pay trust funds and other creditors, or power and authority to determine who gets paid first or last.
According to the IRS, a responsible person is a person or group of people who have the duty to perform and the power
to direct the collecting, accounting and paying of trust funds. This person may be:
- an officer or an employee of a corporation
- a member or employee of a partnership
- a corporate director or shareholder
- a member of a board of trustees of a nonprofit organization, or
- another person with the authority and control to direct the disbursement of funds.
The IRS may assess the penalty against anyone:
- who is responsible for collecting or paying withheld income and employment taxes, and
- who willfully fails to collect or pay them.
According to the IRS, for willfulness to exist, the responsible person must:
- Have known about the unpaid taxes, and
- Have used the funds to keep the business going or allowed available funds to be paid to other creditors.
- Other standards regarding willfulness include intentional, deliberate, voluntary, reckless disregard, knowing or
accidental, free will or choice.
The issues presented in determining who the responsible person is and whether or not willfulness exists depends
upon the facts and circumstances in each case. If the taxes are not paid, the IRS will be looking for someone to penalize. It
may be you.
If the IRS is planning to assess the Trust Fund Recovery Penalty against you, or if they have already assessed
the penalty against you:
- Do you know what are your rights are?
- Are you the person who should be assessed, or is it someone else?
- Do you know if you have been assessed the proper amount of "Trust Funds"?
- Will you qualify for an "Offer in Compromise"?
- Can you qualify to make installment payments?
- Will you lose your home, your bank account, your car or your life savings?
- Will you qualify for an offer in compromise or an
You have the right to appeal the assessment
Taxpayer's Response to Letter 1153(DO)
After Letter 1153(DO) and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty, have been properly delivered (IRM 22.214.171.124), the responsible party has 60 days (75 if the letter was addressed outside of the United States) from the date of the mailing of the notice or the date of personal delivery to respond.
A protest is timely if it is postmarked or mailed by certified or registered mail, so that the mailing date can be proven, on or before the 60th day (75th day if the letter was addressed outside of the United States) after the date the Letter 1153(DO) was mailed or personally delivered. A private postage meter stamp is not evidence of when a request for appeal was mailed; it merely establishes when it was stamped.
In determining the timeliness of the appeal, the guidelines in I.R.C. 7503 should be followed which state in part:
When the last day prescribed under authority of the internal revenue laws for performing any act falls on Saturday, Sunday, or a legal holiday, the performance of such act shall be considered timely if it is performed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday.
Allow an additional 5 days beyond the response period allowed in the Letter 1153(DO) to enable the Service to receive and process all timely mailed requests.
The responsible party can take the following actions in response to Letter 1153(DO):
The ATFR application will not allow you to proceed until one of the following actions occurs:
The 60 day (or 75 day) time period expires
Form 2751 is signed (which waives the 60-day restriction on notice and demand if signed by the taxpayer — IRM 126.96.36.199(2) and (3))
A protest letter is received
A jeopardy assessment is being made
In all cases regardless of the taxpayer’s action, the revenue officer will complete TFRP processing and forward the case to Advisory, Control Point Monitoring (CPM) not later than 30 calendar days after the required response period allowed in the Letter 1153 (DO), (60 days after the date the Letter 1153 (DO) was mailed or personally delivered, 75 days if the letter was addressed outside of the United States). In the event that an employee is unable to meet the 30-day time period, he/she shall document the reason for the delay in the ICS history.
Don't wait. Contact us now. We can help you with the answers to these questions.
Don't ignore the problem, time is of the essence. Waiting only causes you to lose your rights and makes the problem worse, much