WHEN A CORPORATION HAS UNPAID
Form 941 employment tax liabilities, the IRS may propose to assert the Trust Fund Recovery Penalty against the owners, officers, directors, shareholders or other persons. By taking this action, the IRS asserts corporate liability against the people that run the business and can collect this liability from their personal assets. As discussed in the COLLECTION - INDIVIDUAL section of this website, IRS collection efforts can include levies on wages, levies on bank accounts, and seizure of assets. The corporate form provides little protection to individuals should the IRS choose to assert the Trust Fund Recovery Penalty against them.
In determining whether to assert the Trust Fund Recovery Penalty against an individual, the IRS looks at various factors including, but not limited to, check signing authority, the position held within the company, the percentage of ownership, the amount of control one can exercise over decision-making authority, who signed the tax returns, and who hired and fired employees. These factors are used to determine whether the Trust Fund Recovery Penalty should be asserted against the persons involved in the operation of the corporation. By asserting the Trust Fund Recovery Penalty against individuals, the IRS expands its collection potential to additional taxpayers.
The Trust Fund Recovery Penalty consists of all of the income tax that was withheld from employees' wages plus the employees' share of FICA and Medicare, less certain credits. The Trust Fund portion of the Form 941 liability is typically around 70% of the total due, exclusive of penalties and interest.
In its investigation of whether to assert the Trust Fund Recovery Penalty against individuals involved in a corporation, the IRS typically completes a
Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes, in an interview with a taxpayer. When the IRS proposes to assert the Trust Fund Recovery Penalty against an individual, it issues a
Form 2751, Proposed Assessment of Trust Fund Recovery Penalty. An individual has sixty (60) days from the issuance of the Form 2751 to file a protest in respect of the proposed liability.
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BUSINESSES
If you operate your business as a sole proprietorship, the IRS can collect the entire unpaid Form 941 liability (Trust Fund and non-Trust Fund), plus penalties and interest, from the individual that operates this business. The Trust Fund Recovery Penalty does not generally apply in this situation.
Businesses frequently make voluntary payments to the IRS without proper designation language. If a business makes a voluntary payment to the IRS without proper designation language, the IRS typically applies these funds first to penalties, then to interest, then to the non-Trust Fund portion of the corporate liability, and lastly to the Trust Fund portion of the corporate liability. The application of money in this fashion continues to expose the individuals who run the business to the potential assertion of the Trust Fund Recovery Penalty. All voluntary payments should contain special designation language to ensure that the payments benefit the individuals and reduce or eliminate the potential assertion of the Trust Fund Recovery Penalty against them. Patrick T. Sheehan and Associates can carefully craft this special designation language for you.
If you own or operate a corporation that has unpaid federal Form 941 liability or if you are an officer or shareholder and are concerned about your personal exposure, please call us, we can help. If the IRS has discussed the possibility of asserting the Trust Fund Recovery Penalty against you, has proposed to assert the Trust Fund Recovery Penalty against you individually, or has already assessed the Trust Fund Recovery Penalty against you, please call us.
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