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Offer In Compromise
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Trust Fund Penalties 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
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
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
1. A determination of responsibility is dependent on the facts and circumstances of each case.
2. Potential responsible persons are:
Argument to Protect Taxpayers Charged
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.
For Immediate IRS Tax Help Email: info@irstaxattorney.com
Special Tax Topics Brought to you by Alvin S. Brown, Esq., attorney at law, former Supervisory Manager and Tax Attorney-Advisor, Internal Revenue Service, Office of Chief Counsel, Internal Revenue Service.
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