Services: Trust Fund Recovery Penalty

A Serious Penalty Affecting Individuals and Businesses

When a corporation has unpaid Form 941 liability (Employer’s Quarterly Federal Tax Return), 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 the corporation’s liability against the people that run the business and will collect this liability from their personal assets. IRS collection efforts can include levies or garnishments on wages, levies on bank accounts and seizure of assets. The corporation provides no 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 the people that run the business.

The Trust Fund Recovery Penalty consists of all of the income tax that was withheld from employees’ wages and the employees’ share of FICA and Medicare. The Trust Fund portion of the Form 941 liability is typically around $.70 of every dollar but does not include penalties or interest.

Case Study: In this case study, because of the downturn in the economy, our taxpayer stopped making his federal tax deposits related to his employees. The taxpayer felt that it was more important to keep his employees and to not pay the employment tax rather than letting his employees go or shutting his doors. Not only did his corporation have unpaid tax, penalties and interest due to the IRS, the IRS also asserted the Trust Fund Recovery Penalty against the owner individually. In addition to attempting to collect the liability from the business, the IRS also attempted to collect the Trust Fund liability from the business owner’s personal assets. Patrick T. Sheehan & Associates was able to negotiate a resolution not only for the business but was able to shield the business owner from the Trust Fund Recovery Penalty.

In its investigation of whether to assert the Trust Fund Recovery Penalty against individuals involved in a corporation, the IRS typically interviews the people who run the business to determine who the Trust Fund Recovery Penalty should be assessed against. 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. That individual has sixty (60) days from the issuance of the Form 2751 to file a protest in respect of the proposed liability.

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 you. The Trust Fund Recovery Penalty does not generally apply in this situation.

Businesses frequently make voluntary payments to the IRS that do not contain 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 personal liability under the Trust Fund Recovery Penalty. All voluntary payments to the IRS should contain special designation language to ensure that these payments benefit the individuals that run the business and reduce or eliminate the threat of personal liability under the Trust Fund Recovery Penalty. Patrick T. Sheehan & Associates can carefully craft this special designation language for you.

Case study: In this case study, the IRS pressured a business owner to liquidate personal assets to partially pay the corporation’s liabilities. The taxpayer liquidated personal assets and wrote a check from his personal account to the IRS to pay some of the business’ taxes. Because the taxpayer did not designate the funds, the IRS applied the payment first to penalties, then to interest, then to the non-Trust Fund portion of the tax. The IRS then asserted the Trust Fund Recovery Penalty against the owner of the business, forcing him to pay the remaining tax liability out of personal assets. If the business owner had sought the advice of Patrick T. Sheehan & Associates, he would have avoided personal liability under the Trust Fund Recovery Penalty because the funds would have been properly designated.

If you own or operate a corporation that has an 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 raised 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, we can help. Call us before the IRS calls you!®