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Trust Fund Recovery Penalty

On a federal Form 941 or Form 944 tax return there are two types of taxes, namely Trust Fund taxes and non-Trust Fund taxes. The Trust Fund Taxes consist of the income tax withheld from your employees along with the employees’ withheld FICA and Medicare taxes. The non-Trust Fund portion consists of the employer’s contributions towards FICA and Medicare. Roughly speaking, approximately 70 cents of every dollar listed on a 941 tax return consists of Trust Fund tax.

Case study: Business Partner Not Aware of Company’s Tax LiabilityIn this case study, two individuals, including our taxpayer, ran a corporation that had employees. The corporation was successful for many years and our taxpayer earned a substantial income from the corporation. However, after a period of time, the business started doing poorly. Our taxpayer worked away from the office and was in charge of field operations. The taxpayer’s partner worked primarily out of the corporate office and made all of the day-to-day decisions regarding the operation of the business. Both partners could hire and fire employees, could sign checks, could make business decisions and could sign tax returns. However, as a practical matter, the partner charged with the day-to-day operations of the corporation who worked in the corporate office made those decisions. The business stopped filing its federal Form 941 tax returns and stopped making the associated federal tax deposits. As a result, the business incurred $700,000.00 in unpaid federal Form 941 liability. The IRS subsequently proposed to assert the Trust Fund Recovery Penalty against both partners, including our taxpayer. Because our taxpayer was not in the office and did not make business decisions, we raised the defense of responsibility and/or willfulness. This case is still pending before the IRS.

Case study: IRS Pressures Business Owner to Liquidate Personal AssetsIn 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 payment of personal funds to the IRS would have been properly designated.

If you own or operate a corporation that has an unpaid federal Form 941 or Form 944 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 the tax lawyers at Patrick T. Sheehan & Associates; we can help. Call Us Before the IRS Calls You!®

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Chicago Area Tax Attorneys

Chicago Tax Attorneys

314 North York Road
Elmhurst, IL 60126

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