“Trust Fund Trap”
you have a business and are experiencing cash flow problems.
The rent is due, utilities are due, creditors are calling,
and your employees need to be paid.
You know that the employment taxes are due for the current
quarter, but the IRS is not calling. So, you put the employment
taxes on the “back burner” and pay those “important”
you know it, the outstanding balance has become very large.
In reality, you didn’t pay the “important bills”. You
yielded to the pressure of the moment.
Further, by not paying the employment taxes, the IRS will
be in contact, and they will be very aggressive with “their”
employment taxes. Words do not adequately describe the historical
conduct of the IRS concerning these tax debts.
Possibly words like
“downright nasty”, "thug", “vicious”,
start to shed some light.
Because the government views these taxes as “their
money”. You were
just trying to keep your business alive and functioning. But now, you
personally, can be subjected to wage garnishment, bank levy, loss
of housing, in addition to the stress on your marriage and
had good intentions, but have dug a financial hole for
yourself in your INDIVIDUAL capacity. You
were thinking that the debt is a corporate debt. You
were wrong. The IRS will hold “responsible
persons” personally liable for what is referred to as the
trust fund portion of the employment taxes. Thus,
not only does the company owe the taxes, but you, as a
“responsible person”, will also be liable for the trust fund
portion of those same taxes! This
is many times referred to as the “Trust Fund Recovery Penalty”.
The Trust Fund Recovery Penalty
(the 100% penalty) is authorized under section 6672 of the
Internal Revenue Code.
IRC Section 6672(a) 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.
Thus, in determining whether to proceed with assertion of the
Trust Fund Recovery Penalty, the IRS must determine:
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.
The IRS will request targeted
taxpayer's to complete an interview form. The purpose of the
questions is to determine liability. Experience has shown that
persons do not understand nor appreciate the significance of their
responses, and many times, unintended consequences result. The IRS
representative is not your friend. He or she is there to achieve
the objective of targeting as many persons for the liability as
possible. The IRS person may "seem nice" and
"friendly", but their job is to "cement"
you into liability which is generally not dischargeable in
bankruptcy. These forms should never be filled out without the
aid and assistance of legal counsel.
times the IRS will also interview others, including employees,
about what job duties were. The disaster is that many people
provide information that they "assume" to be the facts,
and based on hearsay. They make statements based upon their
conclusions on matters they actually don't know anything about. As
a potential target, you may even have some type of feeling of
"obligation", and that you must be
"somehow" "responsible". However,
the requirements of Responsibility
and Willfulness are legal terms. They
are the legal conclusions based upon evidence and facts. It is the
facts and evidence which must be assembled and reviewed from a
legal perspective. In arguing against liability, legal counsel is
painting a picture upon which the ultimate conclusions will be
cases I have handled had already become entrenched at the IRS
level, and the IRS had developed an administrative position on the
case before tax counsel was even engaged. This "IRS
administrative concrete wall" once formed can be extremely
difficult to breach.
the other hand, In some cases, the liability of the person is
clear. In those instances appropriate actions may be taken to
reduce the personal liability exposure. Sometimes, taxpayers
have taken actions that should have been done differently to
reduce personal liability, and they effectively placed vital funds
in the "paper shredder". The time determine the correct
or preferred course of action is before you do it.
intervention by experienced tax counsel is the best course of