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Trust Fund Recovery Penalty (100% Penalty)

 The “Trust Fund Trap”

So 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” bills.  

Before 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”, and  “tyrannical” start to shed some light.

Why?  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 children.

You 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:

1. Responsibility and
2. Willfulness

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. 

Many 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 based. 

Many 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.   

On 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.

Early intervention by experienced tax counsel is the best course of action. 


The above limited information is intended for informational purposes only.  If legal advice or other expert assistance is required, the services of a competent professional should be sought, and this general information should not be relied upon without such professional assistance. 



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