The federal tax forms 941 and 944 have two different types of taxes: taxes from a Trust Fund and taxes from the Government. You have to withhold income taxes from your employees along with FICA and Medicare taxes. Contributions to FICA and Medicare are not included in the Trust Fund portion. On a 941 tax return, Trust Fund tax makes up about 70 cents of every dollar.
How Does the IRS Come After Me Individually?
An IRS agent will attempt to collect all taxes owed to a corporation by using Forms 941 or 944, which include Trust Fund taxes, non-Trust Fund taxes, penalties, and interest. It is also possible that the IRS will apply the Trust Fund Recovery Penalty to the corporation if it is unable to pay the tax liability in full or fast enough. Revenue Officers generally visit the business and meet with business owners, directors, officers, and shareholders. In that meeting, the Revenue Officer will usually conduct an interview using Form 4180. Accordingly, the Revenue Officer is able to determine if any of the corporation’s unpaid Trust Fund liabilities should be transferred to them. Those individuals will then receive a letter proposing they be liable for the Trust Fund Recovery Penalty. Within 60 days from the date of the letter, the IRS requires individuals to file a Protest. In case a Protest is not filed in a timely or proper manner, there will be an assessment of Trust Fund liabilities against that person. Taxpayers who have been assessed the Trust Fund Recovery Penalty may be subject to a collection action by the IRS against their personal assets.
What Are the Defenses to the Assertion of the Trust Fund Recovery Penalty Against Me?
There are generally two defenses to the assertion of the Trust Fund Recovery Penalty, namely responsibility and/or willfulness and numerical accuracy.
1. Defense of Responsibility and/or Willfulness
Individuals who owe the IRS money for tax liabilities in issue and who willfully fail to pay those tax liabilities are sought by the IRS. Trust fund recovery penalties are generally applied to individuals who decide not to pay the government. The Trust Fund Recovery Penalty can be imposed even if a person had the responsibility to pay the tax debt, and allowed others to do so. This ground can be used at your defense to raise the argument that you were not negligent nor willful in failing to pay your unpaid tax liabilities.
2. Defense of Numerical Accuracy
Trust Fund Recovery Penalties are frequently calculated inaccurately by the IRS, therefore they are generally higher than they should be. We ensure that the trust fund recovery penalties calculated by the IRS are accurate for our clients by performing a thorough analysis. When we argue for our clients’ trust fund recovery penalties, we frequently use numerical accuracy as a basis; this allows the IRS to decrease the penalty substantially.
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.
What if My Business in Not a Corporation?
You may be liable for the full unpaid liability (Both Trust Fund and non Trust Fund) along with penalties and interest if you are a sole proprietor or a one-member LLC. There is no common Trust Fund Recovery Penalty in this situation.
Can I Make Voluntary Designated Payments to the IRS?
The IRS regularly receives voluntary payments from businesses that do not contain the proper designations. Usually, if a business pays the IRS without proper designation language, the IRS first applies these funds to penalties, then to interest, then to the corporate liability portion not found in the Trust Fund, and then to the corporate liability portion found in the Trust Fund. By applying money in this way, the business owners continue to be personally liable for Trust Fund Recovery Penalties. Whenever we make a voluntary payment to the IRS, we should include special designation language to ensure that these payments benefit the individuals who run the business and eliminate or reduce personal liability under the Trust Fund Recovery Penalty. Using the IRS Trouble Solvers Seattle, you can craft your special designation language.
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 the IRS Trouble Solvers™, 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.
Generally, when you have employees, you withhold their Medicare and Social Security contributions from their paychecks, and you often withhold some income tax as well. Trust fund taxes are amounts owed to the IRS, and you need to pay them.
Trust Fund Recovery Penalties can be very serious penalties if you do not make those payments.
Tax and Social Security withholdings are withheld from paychecks by employers that fail to forward them to the IRS. You’re subject to the Trust Fund Recovery Penalty. Tax penalties imposed by the IRS are among the highest. Taking it very seriously, the IRS is not hesitant to seize your assets to recover the money they lost as a result of making late payments.
Any taxpayer whose trust fund taxes are not collected and paid will be subject to this penalty. The list includes owners, CEOs, and directors, but it can also include employees, third-party payroll administrators, outside accountants, and bookkeepers. In corporations, shareholders can also be held accountable, and in non-profit organizations, board members can be held responsible.
The organization’s tax collectors and/or payers are considered liable for these taxes. In addition, anyone who knowingly fails to pay taxes is also liable. It will take all measures necessary to get the money back to the liable individuals, and the IRS can hold multiple individuals accountable.
Generally, a person has to prove they were aware there were taxes due but not paid before the IRS can establish responsibility. In order to violate the law, one must intentionally or willfully ignore it. You can demonstrate willfulness if you or someone related to your organization used payroll money to pay another bill instead of the income tax money for payroll.
Despite its size, the Tax Fund Recovery Penalty is not insignificant. The unpaid amount of taxes is equal to that amount. In addition to any income tax withheld from employee paychecks, this also includes social security and Medicare contributions. In addition to Social Security and Medicare contributions, the Federal Insurance Contributions Act (FICA) is charged.
Consider the following example: you pay $1,000 to an employee. In addition to taxes, be sure to withhold $62 for Social Security and $14.50 for Medicare from your paycheck. However, none of that money was sent to the IRS. A $176.50 unpaid tax bill results from this situation. As a penalty, you owe that amount and that amount again. This doubles your bill.
Considering a single employee over a longer period of time, that’s quite a bit. There can be staggering numbers with multiple employees.
A company whose trust fund taxes have not been paid by the IRS is assessed to determine if it is responsible for paying these taxes. During this process, the IRS requires the company to provide multiple documents and extensive information.
Statements from the bank and canceled checks are part of that information, but it also includes details about who knows passwords for online accounts and who has the PIN for a bank card. Where and who is paying the bills is what the IRS wants to know.
The agency may also request the articles of incorporation and partnership agreements to better understand the structure of power in the corporation. An IRS agent will then contact those individuals who appear to be responsible, if they are found to be responsible.
What Is the Interview for a Trust Fund Recovery Penalty?
Interviewing is a complicated process. A summons may be sent to you if you are thought to be responsible for the missing taxes, whether you are the owner of the company or not. Form 4180 interviews are sometimes referred to as such.
Tax penalties can be paid in a variety of ways. The full payment may not be available at the time of purchase. You may apply for an installment agreement or payment plan. Alternatively, you can use the Compromise program or an installment agreement to settle the tax debts for less than you owe.
Getting in touch with the IRS Trouble Solvers Seattle and setting up an agreement with the IRS is key to avoiding IRS wage garnishments and asset seizures. This penalty cannot be discharged in bankruptcy.
Trust-fund taxes can be understood better if you understand their counterparts outside of trust funds. Employers send trust fund taxes to government on behalf of their employees because employers trust them with their funds. Employers are supposed to keep the funds in a trust fund till they send them to the IRS. It is not their responsibility to do anything with the funds.
However, there are also taxes that do not come from trust funds. Social Security and Medicare contributions must be matched by employers. Nontrust fund taxes are those matching amounts.
Taxes owing by the business are typically nontrust fund taxes. The law doesn’t hold individuals responsible. Your business structure determines the specific liability rules. It is possible to be held personally liable for both trust fund and non-trust fund taxes if you are self-employed or the sole principal of an LLC.
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 IRS Trouble Solvers Seattle we can help. Your BEST bet to resolve your IRS Debt!®