IRS Trust Fund Recovery Penalty”
Trust Fund Recovery
Penalty (100% Penalty)
called the 100%
Civil Penalty, Criminal Exposure, and Civil Injuntions
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.
Fund Recovery Penalty Interview - (copy
of form 4180)
IRS will request targeted taxpayer's, as well as other potential
witnesses, to complete an interview form (form 4180). The purpose of the
questions is to determine liability (an element of which is
“willfulness”). Experience has shown that persons do not understand
nor appreciate the significance of their responses.
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.
These forms should never be filled out without the aid and assistance of
POTENTIAL CRIMINAL PROSECUTION
serious nature of the Responsible Person “Interview” and form 4180, is
that there exists not only civil liability exposure for the Trust Fund
Recover Penalty, but also the potential for criminal prosecution.
stated by in the U.S. Department of Justice Criminal Tax Manual (copy
“the primary focus of § 7202 [criminal prosecution] is on taxes required
to be withheld from the gross wages paid to employees”.
Note that this
is the same subject as the Trust Fund Recovery Penalty.
Criminal Statute, 26 U.S. Code § 7202 - Willful failure to collect or pay
over tax, provides:
person required under this title to collect, account for, and pay over
any tax imposed by this title who willfully fails to collect or
truthfully account for and pay over such tax shall, in addition to
other penalties provided by law, be guilty of a felony and, upon
conviction thereof, shall be fined not more than $10,000, or
imprisoned not more than 5 years, or both, together with the costs of
let’s look at 26 U.S.
Code § 6672 - Failure to collect and pay over tax, or attempt to evade or
defeat tax (The Trust Fund Recovery Penalty provision):
(a) 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….”
use of the same terminology in both the Civil and Criminal statues, is
cause for concern.
about your admissions, or making statements, during an interview concerning
the Trust Fund Recovery Penalty? How
does the U.S. government view such?
Department of Justice criminal manual advises that: Prosecutors
should ascertain whether an IRS Form 2751, Proposed Assessment of Trust
Fund Recovery Penalty, or an IRS Form 4180, “Report of Interview with
Individual Relative to Trust Fund Recovery Penalty or Personal Liability
for ExciseTaxes,” was completed during the civil administrative part of
the case, because these documents may contain relevant admissions or
statements by the defendant.
U.S. Department of Justice Criminal Tax Manual, further states, in
7202 enforces the requirement that employers and “responsible
trust fund taxes from the gross wages of employees, truthfully account
for those withheld taxes, and pay over those taxes to the United
States Treasury. Under § 6672, a voluntary, conscious, and
intentional act of paying the claims of other creditors, including the
wage claims of employees, instead of paying over the trust fund taxes
to the IRS, constitutes a
“willful” violation of the duty to pay over. In other words,
“[e]mployees to whom wages are owed are but a particular type of
creditor,” and a person violates his statutory duty to pay over
where he pays the wage claims of employees instead of the employment
tax claims of the United States.13
v. United States,
521 F.2d 325, 328 (9th Cir. 1975) (holding that “the payment of net
wages in circumstances where there are no available funds from which
to make withholding is a wilful failure to collect and pay over under
§ 6672”). The Tax Division has successfully argued in § 7202
cases that repeatedly paying net wages to employees knowing that there
are insufficient funds to pay the concomitant withholding taxes
constitutes criminal willfulness. See
266 F.3d at 1185 (based upon evidence that the defendant repeatedly
paid net wages to his employees knowing that withholding taxes were
not being remitted to the IRS, the court agreed that the defendant’s
“act of paying wages to his employees, instead of remitting
withholding taxes to the IRS, shows that he voluntarily and
intentionally violated § 7202.”). (emphasis added)”
What about your “good faith” in just trying to keep that business
running? In this regard, the U.S. Department of Justice Criminal
Tax Manual states:
defendant may argue that she was using the withheld tax to pay current
expenses so she could keep the company operating and eventually pay
the delinquent tax in the future. Although such facts may affect jury
appeal and perhaps how the judge views
the government proves the defendant voluntarily and intentionally used
unencumbered funds to pay creditors other than the United States, the
jury may properly
convict even if the intentional non-payment of the known trust fund
tax liability was motivated by a desire to keep the business afloat.
v. United States,
848 F.2d 740, 741–42 (6th Cir. 1988) (in a § 6672 case, the court
held that “[i]t is no excuse that, as a matter of sound business
judgment, the money was paid to suppliers and for wages in order to
keep the corporation operating as a going concern—the government
cannot be made an unwilling partner in a floundering business.”); Blanchard,
at trial showed that in spite of the corporation’s persistent cash
shortages and precarious financial condition, the defendant continued
to pay net wages to the employees for five years without paying the
concomitant payroll taxes). (emphasis added)”.
reading of the above, reflect that the fact patterns in the above examples are not rare. They are very real world situations, and Trust
Fund Recovery cases routinely involve similar type fact patterns. Yet,
Taxpayer’s continue in their failure to understand the civil and potential
criminal exposure they face.
As “they” say, the road to hell is paved with good intentions. This is
an area of taxation law that has been referred to as “draconian”, and
“a living hell”.
its Press Release of April 27, 2016, the Department of Justice reminds
taxpayers of the April, 2016 filing deadline (copy
of Press Release is here) and reminds employers that they have
a legal responsibility to collect and pay over to the Internal Revenue
Service (IRS) taxes withheld from their employees’ wages. For employers
and other responsible persons who fail to withhold, report, and pay
employment taxes to the IRS, the Department advises that it is committed
to enforcing federal employment tax laws through both civil litigation and
criminal prosecutions. The Amount of Tax Revenues are substantial - Taxes
withheld from employee wages accounting for approximately 70 percent of
annual revenue collected by the IRS, and as of September 2015, more
than $59 billion of tax reported on employment tax returns remained unpaid.
The IRS and the Department of Justice are working together.
Press Release (April 27, 2016) makes clear that an individual’s
failure to comply with employment-tax obligations is not simply a civil
matter. Employers who view amounts withheld from employee wages as a
personal slush fund, treat withheld employment taxes as a loan from the
government that can be repaid if and when they see fit, or whose business
model is based on a continued failure to pay employment tax, are engaging
in criminal conduct and face prosecution, imprisonment, monetary fines and
restitution. According to statistics provided by IRS Criminal
Investigation, in the 2015 fiscal year, individuals convicted of
employment tax crimes were sentenced to an average of 24 months in prison.
The IRS Press release above references taxpayers who failed to pay payroll taxes in the millions of dollars. However, criminal exposure is not
limited to such million dollar type cases.
For example, a trucking firm owner, who admitted to evading more than
$300,000 in employee payroll taxes, received an 18-month prison
term (March, 2016).
U.S. Department of Justice News for Thursday, February 23, 2017, advised that a North Carolina Man was Sentenced to Prison For Failing to Pay Employment Taxes.
The prison sentence was 15 months, and he was ordered to pay restitution to the IRS in the amount of $385,610.
Injunctions Against Employers
Government also can seek Civil Injunctions. Violation of an injunction can
result in civil or criminal contempt, including incarceration.
The U.S. Depart. of Justice,
on its web site, states that it is continuing to pursue civil injunctions against employers
and their principal officers who willfully fail to truthfully collect, account for and deposit employment tax. According to the DOJ, the
terms of the injunction impose various requirements and prohibitions, including the obligation to comply with the
law and provide current notice of each deposit to the IRS, as well as restrictions on opening and operating new businesses
and transferring or dissipating assets. When employers violate these injunctions, the Tax Division stands ready to seek orders
of civil or criminal contempt, including incarceration of the principal
officer(s), to bring the business into compliance.
A recent April 21, 2017 Order for Permanent Injunction is attached
bottom line is that a taxpayer should not attend an Interview / Meeting
concerning these matters, or fill
out form 4180 (Report of Interview With Individual Relative to Trust Fund
Recovery Penalty or Personal Liability for Excise Taxes), without the
assistance and advice of a Tax
asked questions about the IRS Trust Fund Recovery Penalty, and
related Topics and information are Here.
|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.