Trust Fund Penalty Defense

Trust Fund Recovery Penalty Defense

Troubled businesses will often “borrow” from the government when they are having trouble making expenses. They do this by taking the employee withholding tax and using it for operation expense instead of depositing it with the U.S. Treasury.

What appears to be a good idea at first ends up being a nightmare for the person(s) who decided to take this route. Why?

Normally, the corporate umbrella protects the officers, directors and shareholders against debts owed to company creditors. When it comes to payroll/employment taxes however, the IRS is able to ignore the corporate protections and try to collect the “trust fund” or employee portion of the employment taxes against some of those officers, directors etc. as individuals.

In order to ignore the corporate veil of protection, the IRS must prove that the party they are interested in “willfully” failed to collect the tax, “willfully” failed to account for and pay over the tax or “willfully” attempted to evade or defeat the tax or the payment thereof.

The amount of the debt that can be assessed against the person responsible is equal to the amount of the tax evaded, not collected or not accounted for and paid that was originally taken from the employee(s) paycheck.

A corporate bankruptcy or “wind down” can’t stop the assessment, and once the “penalty” is assessed it can’t be discharged in a personal bankruptcy. These assessments are typically more difficult to settle via the offer in compromise process then are income taxes.

The primary defense to the assessment of this penalty is to prove that the targeted party had no “control” over the process. Someone who was merely a clerical assistant would explore this defense for example.

Even if the party did have “control”, the inability to personally repay the tax may be a procedural defense. The IRS officer can choose to not assess the penalty if he or she believes that the target is “uncollectible”. Uncollectible means that target of the assessment has very few assets and so little income that any payment on the debt would be a “hardship”.

Typically, the IRS will let the party they are interested in know of the interest by requesting an interview. A list of questions will be asked to help the IRS officer determine whether the assessment should be made.

If this is occurring it is wise to speak to counsel about the defenses that exist prior to agreeing to anything with the IRS Officer.

If the penalty has already been assessed, it can be appealed, but there is a deadline to file the appeal.