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Trust fund taxes are a special breed of taxes are owed to IRS. They are composed of unpaid payroll taxes. When IRS collects the trust fund penalty IRS is seeking a payment consisting of the withholding tax and one half of the Social Security tax not paid on 941 payroll tax returns. This usually results in a tax saving about 40%.
There are multiple tax defenses to go ahead and defend the assertion of the trust find taxes or civil penalties levied or imposed by Internal Revenue Service.
Trust Fund Recovery Penalty Assessments
The trust fund recovery penalty, applicable to withheld income and employment (social security and railroad retirement) taxes or collected excise taxes, will be used to facilitate the collection of tax and enhance voluntary compliance.
If a business has failed to collect or pay over income and employment taxes ( 941) , or has failed to pay over collected excise taxes, the trust fund recovery penalty may be asserted against those determined to have been responsible and willful in failing to pay over the tax.
A Key Point
Responsibility and wilfulness must both be established.
The withheld income and employment taxes or collected excise taxes will be collected only once, whether from the business, or from one or more of its responsible persons.
Collection of the withheld income and employment taxes or collected excise taxes is achieved when the Service’s right to retain the amount collected is established.
Determination of Responsible Persons for the Trust Fund Taxes.
Tax Responsibility is a matter of status, duty, and authority.
Those persons performing ministerial acts without exercising independent judgment will not be deemed responsible.
In general, non-owner employees of the business entity, who act solely under the dominion and control of others, and who are not in a position to make independent decisions on behalf of the business entity, will not be asserted the trust fund recovery penalty.
How IRS determines who is responsible for the trust fund penalty.
1. Who directed or authorized payments of bills to creditors,
2. Who had the right to open and close bank accounts for the business,
3. Good guarantee or cosign loans for the business,
4. Who signed or could cosign checks,
5. Who authorized payroll, who is authorized to make federal tax deposits.
6. Who filled out payroll tax form 941,
7. Who prepared reviewed or signed or transmitted payroll tax returns to the IRS or to the accountant,
8. Who had the right to hire or fire employees,
9. Who made sure other bills were paid other than the IRS,
10. If you were to ask the employees of the company who in fact ran the business who would they point to,
11. Who ran day-to-day operations of the business.
While this is not an all-encompassing list of who is responsible for the trust fund taxes of a company or corporation, this would give the revenue officer out the local office of a good idea to look.
Non Profit Trust Fund Cases
The trust fund penalty shall not be imposed on unpaid, volunteer members of any board of trustees or directors of an organization referred to in section 501 of the Internal Revenue Code to the extent such members are solely serving in an honorary capacity, do not take part in the day-to-day or financial operations of the organization, and/or do not have knowledge of the failure on which such penalty is imposed.
In order to make accurate determinations the IRS will weigh all relevant issues and should be thoroughly investigated.
Non assertion of the Trust Fund Penalty
An individual will not be recommended for assertion if sufficient information is not available to demonstrate he or she was actively involved in the corporation at the time the liability was not being paid.
This shall not apply if the potentially responsible individual intentionally makes information unavailable to impede the investigation.
IRS Field investigations to determine the trust fund recovery penalty liability will be conducted promptly to enhance access to relevant information and reduce burden to taxpayers.
Absent statute considerations, assertion recommendations normally will be withheld in cases of approved and adhered to business installment agreements and bankruptcy payment plans. To the extent necessary, information will be gathered to support a possible assessment in the event the agreement is defaulted.
Application of Payments in Determining Trust Fund Recovery Penalty Assessments
Effective for assessments where notices of TFRP liability are issued on or after June 19, 2000 and for any undesignated payment made on or after January 1, 2003)
Any payment made on the business account is deemed to represent payment of the non trust fund portion of the tax liability (e.g., employer’s share of FICA) unless designated otherwise by the taxpayer.
The taxpayer, of course, has no right of designation of payments resulting from enforced collection measures.
To the extent partial payments exceed the non trust fund portion of the tax liability, they are deemed to be applied against the trust fund portion of the tax liability (e.g., withheld income tax, employee’s share of FICA, collected excise taxes).
Once the non trust fund and trust fund taxes are paid, the remaining payments will be considered to be applied to assessed fees and collection costs, assessed penalty and interest, and accrued penalty and interest to the date of payment.
Small Business Administration regarding Assertions of the Trust Fund.
When employees of the Small Business Administration perform duties in accordance with the regulations of the agency, the Service will not consider assertion of the liability provided by IRC 6672 or 3505 against those Small Business Administration employees in any past, current or future cases arising out of these duties.
A footnote should be added about the assertion of the trust fund penalties.
The local revenue officers have tremendous power in determining who is and who is not responsible for these trust fund taxes. I would tell anybody working on their own case if you do not like the decision from the local revenue officer to make sure you contact the manager in the local office.
IRS will issue a form 2751 if in fact you are held responsible for the trust fund tax.
You have a 60 day right to appeal that starts from the date of the letter from the Revenue Officer.
Call us today for free tax consultation and we will review your case.
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