Trust Fund Penalties

Stop Overpaying Your Tax Liability Presented by Alvin Brown and Associates, tax attorney, formerly with the Office of the Chief Counsel of the Internal Revenue Service. Call (888) 712-7690 for all IRS tax issues, problems and emergencies. Protect yourself from IRS intimidation, errors, and penalties Home page: irstaxattorney.com Email at: info@irstaxattorney.com Other Tax Topics of interest to taxpayers and consultants Offers In Compromise Interest Abatement Tax Refunds Tax Levy Tax Liens Tax Liens - Suing the IRS Appeals Taxpayer Rights New Tax Legislation IRS Statute of Limitations Information Seizures and IRS Enforcement Department of Justice Criminal Tax Manual Tax Fraud Trust Fund Penalties IRS Tax Code and Regulations IRS Installment Agreements Tax Court Taxpayer Advocate and Problem Resolution Tax Audits Tax Penalties IRS Collection Freedom of Information Taxpayer Privacy Innocent Spouse Relief Employee-Independent Contractor Issues IRS Employee Misconduct Bankruptcy and Offers in Compromise Why Tax Protesters Lose Federal Courts IRS Maunal Write Your Congressman	Trust Fund Penalties This information is intended as technical information of use to consultants and individuals doing research. For information on tax assistance, click here.


		Trust Fund Penalties Interest and Penalty Recovery Any person who has a trust fund penalty usually needs an Offer in Compromise. That same person gets collection on his back, so he gets hit with an "IRS tax lien and IRS tax levy" - and he needs the interest and penalty abated. We can help you. The Most Important Things to Know About the Trust Fund Recovery Penalty The Trust Fund Recovery Penalty (the 100% penalty) is authorized under section 6672 of the Internal Revenue Code. Section 6672(a) of the Code provides the general rule: Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. To summarize the statute, in determining whether to proceed with assertion of the TFRP, the IRS must determine: 1. Responsibility and 2. Willfulness NOTE: A person must be both "responsible" and "willful" to be liable for an employer’s failure to collect or pay over trust fund taxes to the United States. The burden of production of the facts and persuasion is on the taxpayer to prove, by a preponderance of the evidence, that he is not a responsible person who willfully failed to collect, account for, or pay over taxes. Who is "Responsible Person?" There are no tax regulations that define the term "responsible person." But that term has been extensively litigated. Some of the "court" comment (quotations of some court decisions) follows to illustrate that the issue is highly factual and the courts use a variety of language to define that term. You will see that the definition of a "responsible person" requires an intensive factual analysis, and the courts have generally focused on those facts bearing on an individual’s status, duty, and authority within the employer corporation. A "responsible person" is one who has the power to control the decision-making process by which the employer-corporation allocates funds to other creditors in preference to its withholding tax obligations. The focus is on the person with ultimate authority over expenditure of funds since such a person is likely to be responsible for the corporation’s failure to pay over its taxes. A "responsible person" has been stated to be any person with sufficient status, duty, and authority to avoid the default on payment. Duties are "viewed in light of an individual’s power to compel or prohibit the allocation of corporate funds." The critical inquiry is whether a person had a duty to oversee, manage, or administer the financial affairs of the company, specifically with reference to the paying of creditors and taxes. Hallmarks of actual authority include the ability to vote a large block of stock, to hire and fire employees, to prepare corporate tax strategies, and to sign corporate checks. The corporate officer or employee is responsible if he or she has significant, though not necessarily exclusive, authority in the general management and fiscal decision of the corporation. Indications of responsibility include the holding of corporate office, control over financial affairs, the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees. The above is the tenor of the language of the courts in identifying a "responsible person." IRS Standard for Establishing the Responsible Person 1. A determination of responsibility is dependent on the facts and circumstances of each case. 2. Potential responsible persons are: Office or employee of a corporation Partner or employee of a partnership Corporate director or shareholder Another Corporation Employee of a sole proprietorship Surety lender Other person or entity outside the delinquent business organization. 3. A responsible person has: Duty to perform Power to direct the act of collecting trust fund taxes Accountability for and authority to pay trust fund taxes Authority to determine which creditors should or should not be paid. 4. To determine whether a person has the status, duty and authority to ensure that the trust fund taxes are paid, the IRS may consider the identity of the persons who: Are officers, directors, or shareholders of the corporation Hire and fire employees Exercise authority to determine which creditors to pay Signs and files form 941, Employer’s Quarterly Federal Tax Return Controls payroll/disbursements Controls the corporation’s voting stock Argument to Protect Taxpayers Charged with Being a "Responsible Person." As indicated above, the issue is highly factual and depends on the facts and circumstances. Taxpayers must be able to research the case law and cite specific cases to negate the IRS determination. You need a tax lawyer to be able to make the factual argument and provide support in the decided cases where other definitions apply. The standards that are used are so broad that anyone can be argued to be a "responsible person" by the IRS. Expert representation is needed to make the factual and legal argument to protect taxpayers on this issue. It is best to have legal representation when the Revenue Officer prepares Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty. Form 4180 is the sole authorized form to be used by the IRS for IRS interviews and is intended to be used as a record of a personal interview with a potentially responsible person. The purpose of the personal interview and Form 4180 is to give the IRS detailed information regarding a person’s involvement in the business. The wrong answers to those questions by an unsophisticated taxpayer will hurt his case. Where signature authority is an issue, for example, it may be argued that the signature authority is merely a convenience - the employee’s function may be solely to pay the bills as directed by a superior, rather then to determine which creditors would be paid first. As another example of creative argument, where a person has been delegated the authority to pay employment taxes, he might be able to argue that the authority was in turn re-delegated to another who then had sole responsibility to pay employment taxes. Further, a taxpayer can argue that under the specific "facts and circumstances" they were not able to exercise independent judgment on financial decisions. One clear defense to being a "responsible person" is to prove that a person was not responsible during the period for which the employment tax was not paid. That person is not "responsible" if responsibility occurred before or after the time that the employment tax was not paid. What is the Meaning of the term "Willfulness?" Once again, that word is not defined in the regulations under section 6672 of the Code. The same term is used to define a crime under section 7201 of the Code. It has been stated that willfulness" is the voluntary, intentional violation of a known legal duty. Evidence of willfulness is often circumstantial, since direct proof of the required specific intent is ordinarily unavailable. It has been held that "willfulness" under section 6672 of the Code is shown by a "voluntary, conscious and intentional decision to prefer other creditors over the government." "Willfulness" is found to exist where there is evidence that the responsible officer had knowledge of payments or other creditors after he was aware of the failure to remit withholding taxes. It is the burden of the responsible person to show that he did not willfully fail to remit taxes. It is stated to be a "deliberate choice voluntarily, consciously, and intentionally to pay other creditors instead of paying the government." Alternatively, "willfulness" has also been defined to be a - reckless disregard of a known or obvious risk that the trust funds may not be remitted to the Government, such as by failing to investigate or to correct mismanagement after being notified that withholding taxes have not been duly remitted. The primary focus is the taxpayer’s diligence in attending to the duty to pay employment taxes. IRS Standard on Willfulness "Willfulness" includes: intentional, deliberate, voluntary, reckless knowing as opposed to accidental. It is the attitude of a person who, having a free will or choice, either intentionally disregards the law or is plainly indifferent to its requirements. The IRS acknowledges that it is difficult to establish "willfulness" to establish the penalty. Section 3509 of the Code also provides a penalty where the employer fails to deduct and withhold payroll taxes and requires the "intentional" disregard of the required to deduct and withhold taxes - willfulness will be implied in those circumstances. The full scope of authority and responsibility would be contingent upon whether the person had the ability to exercise independent judgment with respect the business’ financial affairs. Argument to Protect Taxpayers on Willfulness Once again, this is a highly factual issue. But it is an easier issue to win on than the responsibility" issue. It is a very factual issue "depends on the facts and circumstances." Negligence is not willfulness. But the same acts can be equivocal. Since the penalty is so large, you cannot make any mistake. Get representation by a tax lawyer who will be able to creatively argue the facts and present cases on similar facts to the IRS. The Offer in Compromise Solution An easy solution to the 100% penalty is an Offer in Compromise. Usually, the tax liability is so large, taxpayers cannot afford to pay it. Offers are accepted to reduce tax liability, even the 100% penalty where there is doubt as to liability or doubt as to ability to pay the tax liability. See our page on Offers in Compromise. It makes no difference how large your tax liability is - it can be over $1 million. If you can only afford to pay $1,000 to the IRS, the IRS is required by law to reduce your tax liability. Settlement of an Offer will remove all liens and levies. IRS Trust Fund Penalty Links

	1.	IRS Handbook 5.7, Chapter 4 - Trust Fund Penalty Investigation

	2.	Trust Fund Penalty Information

	3.	Trust fund penalty criminal tax processing

	4.	New 60 day notice before a trust fund penalty can be imposed

	5.	IRS Bankruptcy Procedures
	IRS Trust Fund Cases
	1.	Settler v. United States, 98-1 USTC 50,136 (10th Cir. 1/1/98)

	2.	De Alto v. Unites States, US Court of Federal Claims; 96-4T, 5/13/98, 1998-1 USTC 50,433. Note the following comment in the De Alto case: The inquiry of section 6672(a) of the Code is "a search for a person with ultimate authority over expenditure of funds." "It is not necessary that an individual have the final word as to which creditors should be paid in order to be subject to liability [section 6672]. Rather it is sufficient that the person have significant control over the disbursement of funds." The test is whether (taxpayer) had the status duty and authority to avoid the default. A person's "duty" under section 6672 must be viewed in the light of his power to compel or prohibit the allocation of corporate funds. It is a test of substance over form. This decision was in favor of the taxpayer because the court noted that taxpayer did not have the discretion to choose among creditors. The taxpayer could neither compel nor prohibit the payment of bills. This was the finding of the court even though taxpayer had check-signing authority. The court noted that his check-writing authority was "fundamentally ministerial."

	3.	There is a "reasonable cause" exception to the Trust Fund Penalty. See Finley v. United States, 1997-2 USTC 50,613 (10th Cir. 95-3108, 8/20/97). "Reasonable cause" will negate "willful" failure to pay the payroll tax. Reasonable cause includes "extenuating circumstances." The 10th Circuit states that the "reasonable cause" excuse should be limited to situations: where the taxpayer has made a reasonable effort to protect the trust funds and those efforts have been frustrated by circumstances beyond taxpayer's control

	4.	In Settler v. United States, 1998-1 USTC 50,136 (10th Cir, 96-4211, 1/13/98) it was state that the crucial inquiry is whether the person had the "effective power to pay the taxes" - that is, whether he had the actual authority or ability to pay the taxes owed.

	5.	In the case of Schramm v. United States, 1998-1 USTC 50,132, taxpayer was held not to be a "responsible person" as a matter of law even though he had the title of corporate secretary and executive vice president; accounting personnel reported to him; and even though he was one of two signatories on the checking account and frequently signed checks and tax returns on behalf of the company. It was noted that taxpayer acted simply as a consultant; there was no indication that he could hire and fire employees; and the requirement of another signatory on checks limited his authority. The critical test is stated to be whether the taxpayer exerted "significant control" over the corporate finances. Taxpayer was under orders not to pay outstanding taxes, and taxpayer did not have the authority to pay the Trust Fund Penalty.

	6.	In the case of Farber v. United States, 1998-1 USTC 50,318 (USDC, ND IL, ED; 97 C 3302, 3/20/98) the taxpayer did not actively direct the timing, amount, or choice of payment of creditors or otherwise routinely engage in management decisions regarding disbursal of funds - even though he had the authority to do those acts, he was a 50% shareholder, an officer and director, and a signatory on the bank account. The Court held that taxpayer was not a "responsible person" as a matter of law. The court noted that the issue is whether taxpayer "had the effective power or authority to pay the taxes." Taxpayer signed checks by only after directed to sign by another person.

	7.	In the case of Beauchamp v. Unites States, 1998-1 USTC 50,480 (USDC, WD, NY; 97-CV-6327, 5/11/98), a wife was able to recover the amount paid to the IRS for a wrongful levy. She was held not responsible for her husband's trust fund penalty. The wife did not write checks, had no control of bills and, thus, was held not liable for the employment tax assessed on her husband. The Court held that the the wife could sue for the refund.

	8.	Michaud v. United States, US Ct Fed Claims, 92-8227, 92-823T 11/26/97, 1972-1 USTC 50,972.
	Brought to you by Alvin Brown and Associates, attorney at law, former Supervisory Manager and Tax Attorney-Advisor, Internal Revenue Service, Office of Chief Counsel, Internal Revenue Service. Email: info@irstaxattorney.com.