When a business or employer fails to remit to the IRS the income taxes, social security taxes, and Medicare taxes withheld from employee paychecks, the IRS can collect a portion of the taxes from any person who had a duty to collect and who willfully fails to pay these taxes (referred to as “trust fund taxes”).
If a taxpayer is held personally responsible for non-remittance of these taxes, the IRS could pursue the individual’s personal assets to collect, including using liens and levies. This penalty known as the Trust Fund Recovery Penalty is nondischargeable in the bankruptcy of the responsible person. A responsible person includes (but is not limited to): an officer or an employee of a corporation, corporate director or shareholder, a member or an employee of a partnership, or a member of a board of trustees of a nonprofit organization.
The Internal Revenue Code sets forth two major tests to determine if a person is subject to a Trust Fund Recovery Penalty. These two tests are: (i) whether the party against whom the penalty is proposed had the duty to collect, truthfully account for, and pay over trust fund taxes; and (ii) whether he or she willfully failed to perform the duty.
An act is willful if it is voluntary, deliberate, and intentional. To show willfulness, the government generally must demonstrate that a responsible person was aware or should have been aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. A responsible person’s failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the requirement for willfulness.
We represent taxpayers who face a proposed Trust Fund Recovery Penalty or have been assessed the penalty and can seek to have the penalties reduced or eliminated. If you are facing a Trust Fund Recovery Penalty, contact us to see if we could be of assistance.