On-Demand: Trust Fund Recovery Penalty Basics
January 14, 2021
We discussed the basics about the Trust Fund Recovery Penalty, as well as strategies for its prevention and defense.
Daniel Gibson:And that's how it really spells disaster in this area. And it has to be something that owners and chief financial people have to keep aware of in a business. Hello, my name is Dan Gibson. I'm a partner in the private business services group of EisnerAmper in the Metro Park, New Jersey office. And if you're looking on a map wondering where that was, we're in New Jersey, along the Amtrak corridor between New York and Philadelphia, just about in the middle. I've been in public accounting arena for almost 40 years, 35 of those years with EisnerAmper and now EisnerAmper. And I also, before I start, just wanted to thank the folks in our EisnerAmper marketing department for all the help that they've given me in putting this program, as well as the other programs that I've done. I'm going to try to keep this program right at 50 minutes if possible.
So I'm going to kind of power through this thing. So a lot of material we're going to go through, so try to keep up with me as we go through. So as an introduction, what we're going to talk about is what happens is in the trust fund recovery arena when trouble happens, the assessments, the collection procedures against businesses, the trust fund penalty itself, what it is, how it's assessed, the exposure that third parties, and yes, people outside of the business could be at risk for these trust fund recovery penalties. The IRS actions that are taken against responsible individuals when the business fails to be able to pay the trust funds that are being withheld from employees' payroll. The first step for the IRS, and over the years, it's gotten even quicker to go after who they consider to be the responsible individuals in the organization.
And then we'll end up the program with some strategies to minimize and mitigate my abilities for these responsible persons. So first, a business is, as most of you know, businesses have employees, they've got to pay their employees, probably the most important expense that many of our clients, and I'm sure many that are listening to here today, employee expenses are probably the most important things that keeps our business going. And when the businesses are paying out and doing well, they're withholding certain trust funds. And these trust funds are monies that are the employees' portion of their payroll checks, the FICA, the federal and state withholdings that have to be remitted to the government. Once that fails and businesses fail, the cashflow fails, that withholding becomes an issue.
And as I said before, the immediate action for the IRS is to start going into the company and start looking for those that are responsible for the collection, the accounting and the paying over those withholding taxes, who's responsible? Who is willfully failing to do these things? And this Internal Revenue Code 6672, what it does is it provides the IRS an alternative versus going after the enterprise, which may be down and out and without any cash and it's coffers to pay this trust fund money. It gives them the alternatives to go after these individuals now, personally to go after these funds. These funds are, they're considered to be interest with the individuals and those individuals, if considered to be both responsible and willfully not paying those expenses could be responsible personally for having those funds paid to the government.
And again, what are these trust funds? The trust funds are those employee portions, not the employer match, but just the employee portion of the trust funds, the social security, Medicare, and the withholding. Now, the employer matches, when you talk about those in this context, you often call them the non-trust fund monies, because it's monies that are really not monies that can be pushed down to the individual responsible persons in the business, but become liability. And the IRS can really only has the alternative to go after the businesses themselves for this non-trust fund or the employer match. A side note, I think I've stated in other presentations and it's always a phrase we talk about around the offices whenever you're dealing in anything regarding tax resolution such as this, there's always, unless you're living in Florida or Texas, there's usually a state component to all this.
And you've got to make sure that you are asking the question, "What about the states?" No matter what you're doing. It could be an issue with just someone's just individual return, that they haven't paid the taxes that are owed and you find out that they're behind in their federal tax payments. It's fine if you go ahead and resolve that, but if you haven't addressed the state, that could come up and bite you and you just want to make sure that you get out ahead of that as well. Just a couple more comments on the trust funds themselves. Again, the employers and the people that work for the employers that are responsible for collecting these funds, they hold these funds in trust albeit that they're involuntary, but they're held in trust to submit to the government. In this penalty, this is 100% of the unpaid trust funds.
And usually officers and certain employees can get hit with this penalty, but the trust fund penalty itself is kind of like a hybrid. It's actually, it's a penalty in the penalties section of the IRS code, but it also represents the tax so that if the government collects this tax from the individual, that just reduces the amount of these trust funds that's due from the company. In other words, the government could not, and it should not double dip. And when I say should not, that means anyone who's working in this area should be just making sure that the government isn't double-dipping on both sides of this. There is no requirement for the government to go after the company, more than likely the company as I said, is going South. And the IRS obviously will take a look at that. And as soon as they find out that there's no money there, they will start initiating the trust fund recovery penalty procedures trying to identify the parties.
Now, it takes a little while, we'll get into some of the things that the government has to do in order to identify those persons.
The fact that the IRS has to prove both willfulness and responsibility for the persons and the government takes the trust funds extremely, extremely seriously. They don't mess around in this area as you think they might in some other areas. They really take this seriously. And I can tell you that a lot of folks at the IRS, and I will tell a lot of folks at some of the state governments think it's almost equivalent to theft because it's money that you've withheld from your employees that should be remitted to the government.
If you've already issued them a W2, the employees are already taking them. They're taken credit for the amounts that are reported on that W2, which they can, and there's nothing that the government can do about it. So number one, the government hasn't gotten the money and number two is they're given credit, for these monies on the W2, when a person does their individual tax returns. And at the bottom year, as I said that, the trust fund monies really aren't just penalty, they're a hybrid because they are actually, when they collect that penalty money, it's actually a collection of those unpaid trust fund taxes, all right? So let's flip to the polling question, number one, I'll just give that real quick. That would have been, number three both one and two, flip to slide number nine, you can get hit with the trust fund penalties.
The top four is pretty obvious, any sole proprietor, general partners. There really isn't a trust fund to go after. They can go after everything, because obviously someone who is a sole proprietor or a general partner is your songs and for all the liabilities of the company. So they're not really protected by breaking down the funds between trust and non-trust. The ones that are protected shareholders, LLC members, company, officer's, controllers, bookkeepers. They're obviously those three categories aren't going to be responsible for the non trust funds money, but they will be responsible of the trust fund money.
And again, try it surprisingly enough, there are third parties that are responsible as well. And people who maybe work in this area should be cognizant of this, that the lenders and creditors accounting firms parent companies, purchasing companies, lenders it's typical case. And there's been two court cases on this that lenders that knowingly lend money to a company strictly to pay off their net payroll would be responsible because they're obviously furthering the perpetuation of this non-payment of the trust fund money by paying the people, the employees on that payroll.
And then I'll give you the answers on poll question number two. This is, before assessing trust fund recovery penalties, the IRS must be able to prove that a person is number three both one and two, responsible and willful. So if you flip to slide number 11, who's responsible, we're going to go through who's responsible and who's willful in the criteria for that. So you want to keep this in the back of my back of your mind as I'm going through when the things that would make people responsible, obviously, as you're trying to mitigate this during the process in which the IRS is trying to determine who's responsible and who's woeful, you're trying to counter these arguments. So people who are responsible, people who are responsible are those that are there, they're collecting the tax they're accounting for the tax, they're paying the tax to the government, right?
Those responsibilities also hinge upon the status of the individuals, what the duties are of the individuals? What their authority is? Does that person get involved in the actual payments? Do they pay other creditors other than the IRS? So in other words do they have the ability to make those decisions as to whether to pay the IRS or not? Do they have check signing authorities, company bank accounts, functionally how are these people involved in the financial functioning of the business? Someone who's in operations who may be an owner in the business, but has nothing to do with the financial function may be identified as a responsible person but if you could point out to a revenue officer, "Hey, listen, this person has nothing to do with the financial area. They're an operation's person only, no signature authority."
Sometimes, and also too titles can be somewhat throw people off the track here because you may think that it's cute maybe to have maybe an owner might want to have his wife as VP of the business. And it's really perfunctory, she doesn't do anything at all, but it was nice to give her that title. He may want to rethink that, because the IRS when they come in, she's listed on the corporate records, you've registered the business in the state and they see her name in there. And she probably has nothing to do with the business. Maybe something you may want to rethink, who your officers are and pay attention to that and just be cognizant of the fact that, again none of these things or not one of these things, could you actually point to, you have to actually build a case.
So you have to actually go through the thought process of these things, which the IRS will do. And we'll show how they do that a little bit later. And the last point here with control over signature banking and checks, this note, in general particularly, particularly in the environment that I deal within, which is most small and medium sized businesses, owners are really got to be careful, in this area, most owners will just not get involved in some of these things. And you really got to make sure that, if you're delegating these duties done with bookkeepers or an accountant that works for you and your business that you curate you're checking periodically, maybe you're the first one who opened up a bank account, as opposed to that person.
This is a control the check against that person, maybe a sample, a few checks, you request some backup for those checks. It's the payroll check same play, make sure that those people are actually working on your factory floor, things of that nature, you wouldn't be able to create an environment where you're giving people an excuse, not to do something they shouldn't be doing, all right? So doing these little things can help foster that. Let's flip to the next one slide 12 indicators and responsibility. And again, this is still on the responsibility area where the IRS are trying to build the case and we're trying to counter that case. You'd be looking at the corporate officer holders who talked about making someone, an officer who really probably isn't in the business working, but you want to kind of be cute about it and give it to them.
You want to look at ownership, what kind of, again the functioning working they have in that payroll area, what kind of authority they have in the company? Looking at the government document or the governing documents like shareholder agreement, the operating agreement, hiring and firing authority, check signing authority. It gotta be more than just mechanical. You may give the bookkeeper the authority to sign checks, but it's an authority that's only given after you've approved the checks in the system. It's just a mechanical thing, it's a convenience. So someone's pressing the fact that the signature here is the bookkeeper’s, so he or she must be responsible. You can push back if you are building a case enough to say that she owns, she designed them after it was given the okay to write out and pay these checks, the authority that then signs the file checks.
It's basically the same thing as the authority that do the signed checks. If they're filing payroll returns, it could be just really a mechanical or convenience of the employer argument that you can make at some cases. And there's, if someone has the authority to sign bank loans or security agreements with the company, again, it might be an indicator and that's what it is. These are all points of indication that there might be responsibility there that you can reach. Again the IRS has got to be able to prove both sides of this. Not only someone who's responsible in business, but also someone who was willful and we'll look at willfulness in just a bit here. So on question three, the other one that, the third one that you went through when I was out, the outside third parties can never be assessed trust fund recovery penalties as we spoke about before.
They sure can be assess the trust fund penalty so the answer there is false. All right, so let's get to the slide number 14 for willfulness here. They've gotta be able to prove, the IRS has to be able to prove that someone that was, or should have been aware of the outstanding taxes, not that there was any evil intent not to pay them, but there was an intentional disregard, all right, display the difference and knowing intention to pay other expenses of the business, rather than the payroll taxes. As I talked about at the beginning of the program, owners, officers of the company, things go South, they go bad. They're trying to bridge that gap to getting the company back on track. And you have a lot of creditors out there providing services, the utility companies, fuel companies, what have you, most of them have their hands out at the end of the month.
If they're not paid, you hear about it, the IRS, maybe not so much, it may take them a while to catch up. I know in this area, they've made a purpose of intention to get out in front of this as quickly as they can, but they're not nearly as quick as some of the other creditors. So you're really, you're left to the point of trying to keep your business float, you're paying the vendors who are barking the most and the loudest at that point. And that's where the IRS gets left behind, but you've gotta be able to manage that.
The fact that you don't have enough funds, in the business is not defense enough to say that, "I didn't have enough to pay the trust funds, but I have enough to pay that the net payroll," the IRS would come back and say, "No, you should be prorating the payroll then at that point, so that you can pay the proper withholding and trust funds." The old Nuremberg defense saying that I've been ordered to pay the payroll taxes that normally doesn't work. It's particularly if you're at the management level, if you're being paid quite well and, you can and the IRS convened through someone who can just maybe move on to another company quit. There's not much leniency.
There is at the clerical level. You could see a little more leniency there, but again it's a tough defense to go up against, also the embezzlement defense of someone and we talked about it before, if you didn't have good controls in your business, and all of a sudden you found out that your trusted controller or accountant has just ripped you off and hasn't paid payroll taxes for a number of quarters and the IRS comes poking around and you say, "we didn't know about that." That's not a good defense because the IRS will normally come back and say, "That's your problem. You as an owner, you as a boss, you as a CFO of the business are responsible for supervising these employees." So again, it's a hard thing to go up against.
So flip the next slide assessments. And in the incessant phase of the process here, normally once these quarterly payroll taxes have not been paid, you're normally assigned a revenue officer and the revenue officer was sort of coming, poking around in the business, looking for potential targets. It's normally a shotgun approach, all right? They're looking for bodies at that point to pay the IRS the money that's owed on transfer funds. So one of the first things that they'll do is they'll pull out, what's called a Form 4180, and they will attempt to interview folks on a 4180, the 40th in a Form 4180 and for the most part, you can go out to the internet and find most of the forms that you need, in the IRS's inventory, Whether it be at the Form 1040, 1065, 941, you can usually find those out on the internet.
You're not normally going to be able to find a 4180. They keep that on guard. Many of us have copies of those interview forms. So one of the things you want to be able to avoid here is you really don't want to be in a situation where you have a face to face meeting on a Form 4180. I'll tell you about it in a bit, but you want to avoid it as best as possible. The form has to be filled out, but you should be filling it out separately from the IRS, towing it back in the office, back with your client, filling the form out and then sending it to the revenue officer, or if need be, if you have to go to, or if you have to go to the interview, just reading from that interview form and again, I'll tell you why.
You want to be extremely careful. If the IRS, if the revenue officer has prepared the 4180 himself or herself, you want to be able to review extremely careful because that's the form that they're going to use to finalize their assessment on responsible persons. With this 4180, do not let a revenue officer ever intimidate you about the 4180, if you filled it out and you've given it to the revenue officer, it's complete with all the supporting documentation, he still wants to interview the responsible person, usually can bring up one case called Tal versus The United States, which is a very important case regarding summonses. And it basically says that if the IRS has what they need or what they need to get, which is a 4180, they really can't summons person for a face-to-face meeting.
So don't ever be afraid to push back on a revenue officer on that and make sure the 4180 is done completely. Once the 4180 is done, there is an assessment, there's a letter 1153 that's issued with the assessment and attached to that is a 2751 with the proposed assessment amount. And there's a waiver form and errors, if you want to sign that, I would not. You get 60 days to sign that. I wouldn't rush to sign that because, number one, if you are a responsible person you’re basically going to concede that you owe this amount, you're going to want to have some time to figure out how you're going to make these payments. So use the 60 days to your advantage as best as you can.
Then the other is obviously if you disagree, then you're going to want to push back and appeal at that point, all right? So let's flip to the next slide, which is for Form 2180. This is a typical trap, the form used to be years ago, it used to be eight pages and they condense it down to three pages. And you could probably guess why this becomes somewhat troublesome to someone trying to fill this out. If you look at, the form that I have on slide 16 here, this one section where it says prepared, reviewed, signed, and authorized, transmit payroll tax returns. Well, it's a yes or no answer. So if you've done any of these, let's say you just prepared the return and that's all you've done and you check this off, yes. Then you've really answered yes to all four of these things.
So what you really want to be able to do is not answer either yes or no, but put it on the side here, but in see attached and then attach the supplemental pages, explain fully that maybe you were a preparer of these returns, but you forwarded them to someone else to tax review, sign, authorize and nailed in or email in the payroll tax return and that's all you did. So it gets you out of this responsible person assessment, and you'll have to do this for a number of items. I mean you'll need to go through this and determine whether or not you are, you could answer the questions yes or no. I will guarantee you there'll be a number of them here where you will not be able to and you're going to have to attach supplemental information.
Next, we'll flip to slide 17 on the assessment of the tax fund recovery itself. If the payroll taxes and sales has not been filed, the trust fund penalty, the statute doesn't start. So the data says, "As long as its not filed there is no clock that has started and this amount can be assessed at any time. If the returns have been filed, they file them in a normal basis, which is on a quarterly basis, the 941s. The trust fund penalty can be assessed within three years of the filing. And the filing is deemed to be the April 15th after the year of the quarterly 941 filings. So you have three years after that, April 15th date in which you can be assessed.
So if there's an assessment coming down the pike, you want to make sure you know what that date is, what's your ending date is, and make sure that if you're beyond that and the IRS really cannot go after you at that point, it's the three years has been up. As we've said before the 60 days, there's a 60 days that once you've gotten this Letter 1153, you have 60 days to respond, whether you're going to waive it and acquiesce to it, or whether you're going to appeal that within the 60 days after they assess for those with name, the IRS then starts the notification process and the band for payment from those personal responsible people.
So we slip over to slide 18, protesting the petition. Once the letter 1153 has received, again there's 60 days in order to file that petition. And as I said before, you want to use those 60 days. You don't want to rush those 60 days to either brush, if you're going to contest the assessment, you want to be able to prepare your petition properly. And even if you're conceding and you acquiesce to the assessment use that 60 days, look at what you think your ability to pay those, trust funds will be. If you need to enter it into an installment agreement, if you need to do an offer and compromise. Once the assessment has been made and the IRS starts pushing to collect the money, it becomes a collection case like any other collection case. So you have these alternatives, whether they are installment payment that can be currently not collectible status, but the offers and compromise, whatever it may be, use those 60 days judiciously to get yourself set up to deal with a collection form.
The petition itself, it must include the name, the address and the social security number of the responsible person, you want to make a request for a conference, when you're protesting, and assessment and you want to list out the assessor findings you disagree with, prepare brief on the information previously mentioned, which is stating all the names and dates and locations, any evidence that you've gathered on the 4180 of others, included affidavits, this law and other authorities the copy of the letter 1153, tax periods involved. And one of the things that's important is when you're gathering this information, you do have the opportunity to see what others have done. So, the IRS does have an obligation to provide you with the names of the individuals, that they will also identify those responsible people. And they also have the responsibility of letting you know how much those folks have paid.
And if you end up being the only person who's paid the entire trust fund amount, you have three or four other people who have been assessed, the responsible person assessment, you can go after them. I mean, the IRS will be out of that. But you do have recourse after those folks. So make sure that if you're involved in that sort of situation, you do have the ability to inquire, what those other folks have done? And you'll want to be able to, again, file this protest within the 60 days so you get that in there. And then you get your chance to discuss the case with someone at the appeal's office.
The other thing is that if you find yourself particularly practitioners, if you find yourself in a situation where the ability to protest the assessment, that deadline has passed, there is a plan B and the plan B is looking at possibly doing an offer and compromise. Not so much for the amount. But for the liability if you have an issue, that you think that a person did not get a proper hearing, you can file actually what's called a doubt as to liability filings, you have to offer something so you'd offer a dollar. But you can petition the appeal's office to basically open the case up again and look at this new data to the liability filing, prepare the petition very similar to the one that we did in the previous slide.
If you need any additional information that you can think you get from the IRS on their case, you can file a Freedom of Information Act request. If you Google the IRS disclosure office, it's a pretty easy procedure, facts, the office and request information for your case. It's something that the IRS is required to do and they will do for you. So let's take those two polling question number four.
You definitely don't want to insist on a face to face meeting in the 4180 interview. People who do will get into some trouble if the IRS is filling out that form. And if you are stuck in that sort of a situation where that happens, make sure that form is really well reviewed, I wouldn't sign it there, in the office where the agent has been interviewing the person, if you happen to be in that situation, and you can't get out of it, I would definitely make sure that I took that 4180 and reviewed it very closely with whoever was filling it out.
Alright, so let's go to slide 21. Upon assessment, and collection takes over, as I said before, after the assessments done, the case becomes a collection case, all right? And it runs its course. Alright, so as I said before, take advantage of any time that you have to answer back to the IRS, start working on the form 433, to see what kind of payment plans you could come up with. If not, then the IRS will commence on what I call the letter campaign, it's a four or five letter campaign, which goes out, each letter goes out, like probably each month. And it ends with a final Notice of Intent to Levy. If the final notice is received, the final Notice of Intent to Levy, you're given the opportunity to then to get a collection due process hearing.
And you'll definitely if you get that, you want to make sure any correspondence that you have, sometimes they hide it, but it discusses in here about requesting a collection due process hearing, my advice is always request the collection due process hearing, it protects a lot of rights that the taxpayers have at that point, the IRS at that point has got to halt any collection activities that go on at that point. The exception to halting collection activity, those people who have continuously had issues with typically in this area, the tax relief recovery fund area. If you have one of these bucks in due process hearings, you've had one in the last two years, more than likely IRS will not hold any collection activity at that point.
So you really got to be careful because you can't count on the fact that just because I have a collection due process hearing that the IRS collection activity may be halted. And the other thing before I leave off there with respect to collection due process hearing, when I say in my advice is that you always request that collection due process hearing. I say that one exception, there's always an exception in IRS, in the IRS world and this is one exception is that if it looks like we talked about the three year window in collections at the 10 year window. So if you're, if this case is going on for a really long time, and we're getting close to the end of the 10 years, the collection to process hearing may not be the thing that you want to do because it will stop the statute of limitations and it'll tow it at that point.
You may want to wait and request an equivalency hearing where again, the IRS is not obligated to stop their collections, but you still have to deal with the appeal's office, hopefully, you can work the clock enough to get test that your objective would be obviously to try to get past that 10 year point so that the assessment would drop off at that point.
So let's go over to slide 22. And then I got a couple of slides here where we'll just end it up just some real obvious things, I think, those that are dealing in the payroll area, and trying to avoid trust fund assessments, you want to avoid what I call that the net payroll debacle, all right? Knowing that cracking cash flow crunches, particular times making sure you have the borrowing base in order to borrow money if you need to, if you need to raise prices, cut staff, sell assets. Again, it's a matter of really monitoring your business to make sure that you don't get caught behind the eight ball. Some businesses I've seen in my career are very good at that, they're right on top of it, they're taking action right away, again, if there's a sudden turn down in the economy, or someone loses a major customer, things of that nature, wheels are turning, they're out there making decisions, some of them are hard decisions, to avoid having to only pay payroll taxes, net payroll tax that is.
And the other thing, maybe the other suggestion would be to a lot of folks do this, but have payroll services, that only gets impounded. It does create a bit of discipline for the people running the businesses, so that the money is going to be put there, hopefully it's not, the payroll services pushing back hard, but that doesn't get out of hand. Number two, focus on your business, as you said the owners have got to mind their finances, they can't just leave all the finances to the bookkeeper with carte blanche control, I've seen that in the past, and then hundreds of thousands of dollars later, and owner is stuck with the cash flow issue, because the bookkeeper's conduct with money, whatever, supporting a high lifestyle, maybe going to Atlantic City and gambling, that sort of stuff.
Getting in there early enough stopping the bleeding. You've got to make sure in these instances and this is with all tax resolution areas, in order to really deal with the IRS responsibly, and to go forward with them with some sort of a payment plan did you prepare sins that have occurred, you've got to make sure that you're being current with the payments that you have going forward. If not, that's a non starter for the IRS, you have to get current with payments in order to deal with the past issues that have come up, you'll fill out a form 433 for your business, hopefully set up some sort of a payment plan, whether it be an installment plan, most likely for businesses to get your past sins taken care of.
To flip over to slide 23, we want to designate as best as you can, prior to being forced to pay the payments, as long as the payments are voluntary, you could actually designate partial payments for the payroll to the IRS. And if you do have that opportunity, you want to make sure that the money is being applied against the trust fund tax is not the non trust fund tax. So you want to be able to document that in a check, in the memo section, and you want to be able to in the memo sections I have here to the right, apply the trust funds for first quarter 2018 with your social or the EIN number and then the taxpayer name should be in there.
You want to make sure that if you can write a letter that's attached to that as well. And then say your number five, you're going to want to be able to follow up. Make sure that the IRS is applying these things properly. Because again, IRS can normally only go against the trust fund monies when it comes to the responsible people. When it comes to the businesses they are responsible for the non Trust Fund monies. So as you could well expect the IRS will push to try to make sure that monies that are being paid for payroll are going against any unpaid non trust funds first.
Alright, so if you're in that voluntary stage where you're making payments, you want to make sure that they are applying that properly to the trust funds monies. Because even if you get down to the point and in my last point here, which is very important is that any trust fund monies that you have assessed on yourself and you go into bankruptcy, those Trust Fund monies, and that includes payroll trust fund monies for both federal and withholding for the state and also sales taxes that you've been withholding from your customers that should be remitted to the state, any other withholdings that are out there, that you may or may not have. Those are also funds that the bankruptcy court is not going to be able to help you out with and forget for you. So you want to make sure that you got to be able to strategically and keep that to a minimum and pay down those trust fund monies as best as possible.
So I'm going to be ending at this point. Just remind folks that next month, we do have another program, I do have another program that I'm giving on Innocent Spouse Relief. It's in February 11th at the same time, 1.15p.m. Eastern Standard Time. So just check in with the EisnerAmper event section on their website and register for that and I'll see you next month.