IRS Trust Fund Recovery Penalty
As an IRS income tax lawyer, I know that one of the most frustrating things small business owners can deal with the IRS Trust Fund Recovery Penalty.
When a business owes back payroll taxes (941 federal income tax and FICA withholdings), the IRS can assess a responsible party (typically the business owner) for the trust fund portion of the payroll taxes (the portion from the employee that the employer holds in trust).
Check out the four steps of the IRS Trust Fund Recovery Penalty representation that we do to defend our clients.
(1) 4180 Interview
The first step that will happen is the IRS will contact you about a 4180 Interview. This is the interview where the IRS will ask you about whether you were responsible for the payroll taxes and whether you willfully did not remit them. It is extremely important to have an IRS income tax lawyer present for this interview.
(2) Proposed Assessment
Typically, if the IRS is doing the 4180 interview, they already believe that you are responsible and acted willfully. But, they still have to do the interview. Once that is over, they will send you a proposed assessment, which will tell you how much they are going to assess you personally and how you can appeal that decision.
(3) Appeal Protest
IRS trust fund recovery penalty cases almost always go to appeals. Here, you have to establish that you are not responsible OR you did not act willfully. Only one prong of the determination needs to be ``broken`` to avoid the trust fund recovery penalty from being assessed against you personally. It is important to know the tax law here.
(4) Winning Appeal
Once appeals agrees in your favor, the IRS cannot assess that particular period against you for the Trust Fund Recovery Penalty. This is the goal of the appeal. It is a lengthy and long process, but it is worth it. Again, almost all of these cases typically end up in IRS appeals, so it is so important to pay attention to deadlines.
What exactly is the IRS Trust Fund Recovery Penalty?
As an IRS income tax lawyer, we work with a lot of small business owners who deal with the dreaded IRS trust fund recovery penalty. Let's take a look at exactly what this is.
As an IRS income tax lawyer, I know that payroll taxes fund most of the day-to-day operations of the U.S. government. These are those deductions from paychecks. Business owners have a responsibility to remit those to the IRS (generally, monthly). And when they don’t, the IRS can assess responsible individuals (typically, the owners) with a Trust Fund Recovery Penalty.
This is the “trust fund” portion of the business liability that did not get paid. Now, don’t worry, the IRS only gets one bite at the apple. If the business pays the “trust fund” portion, then the personal liability goes away.
(1) What kind of taxes are “trust fund” taxes (IRS income tax lawyers get asked this a lot)
Business federal payroll taxes include (1) business portion of FICA (social security and Medicare), (2) employee federal income tax withholdings, and (3) employee portion of FICA (social security and Medicare).
The trust fund portion of the above include #2 (employee federal income tax withholdings) and #3 (the employee portion of FICA).
Basically, anything that you, as the business-owner, hold “in trust” from the employee to send to the IRS.
(2) Why does the IRS get to make me personally liable?
As an IRS income tax lawyer, I hear this a lot. Many people think that the business entity offers them liability protection. While that is true, the U.S. tax code allows the government to “pierce the corporate veil” and come after responsible individuals for not remitting trust fund taxes.
However, the IRS must still follow the process. If they follow the process, they are allowed to make an individual personally responsible for the “trust fund” portion of the payroll taxes. The business portion can never be assessed against an individual personally, though.
(3) How does the IRS assess the Trust Fund Recovery Penalty against me?
The process starts with the 4180 interview. The IRS must find that you are responsible and that you failed to remit the trust taxes willfully.
Once they establish those two prongs, they will then send you the proposed liability. You must file an appeal/protest within 30 days if you disagree.
If the appeals officer agrees with the IRS, you may go to tax court to continue disputing the liability. Hopefully, you are able to break one of the links and establish that you are either not responsible, or, your failure to remit was not willful.
Get a Fresh Start with an IRS Income Tax Lawyer Today
If you are ready to have an IRS income tax lawyer look at your case to see if you qualify for IRS back tax relief, click here to get the process started today. Or call us directly for a free consultation at 330-331-7611.
