Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty Act created an exception to the “corporate veil of protection” so that the IRS can pursue individual owners and officer for a large portion of a corporation’s Back Payroll Tax Debt.
A Trust Fund Tax is any tax that you as an owner/officer held “in trust” and were supposed to turn over to the government. The most common Trust Fund taxes are Form 941 Employment taxes and most state withholding and sales taxes.
For the IRS to pursue an individual owner or officer for the Trust Fund Recovery Penalty they mustfind that person to be both “willful” and “responsible” for the nonpayment of the back payroll tax.
The IRS considers willfulness as an intentional, deliberate, voluntary or reckless act and stresses that no evil intent is required. If you knew, or by virtue of your status should have known, that the taxes were not being paid you could be a target of the Trust Fund Recovery Penalty.
Responsibility is usually determined by status or position. The IRS will summon bank records to determine who had authority to and who actually signed checks for the business. If you controlled the company finances, signed checks, and decided which bills to pay you could be “on the hook” so to speak. This can include outside accountants, bookkeepers, etc.
The IRS is given a statute of limitations for assessment of the Trust Fund Recovery Penalty of around three years. We say “around” three years because it’s actually a little more complicated than that.
Due to the complexity of these types of tax debt cases I would ask that you call me to discuss whether you have a defense to the assessment of the Trust Fund Recovery Penalty or if the Statute of Limitations has run.
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