Can I be held personally liable for unpaid 941 employer withholding taxes? What can be done to avoid this/protect personal assets/income?
If you are an owner or officer of a corporation or LLC that has unpaid 941 employer withholding taxes and think that you’re personally off the hook because of your “corporate veil,” think again. The IRS can impose what’s known as the TFRP. This allows it to collect from the personal income and assets of anyone deemed as “willful and responsible” for the non-payment of trust taxes. Owners, officers, and even employees charged with significant financial control of a business entity beware.
TFRP stands for Trust Fund Recovery Penalty. In my 14 plus years of representing taxpayers, this subject is high on the list of most confusing topics for many of my clients. It is confusing for a few reasons, the first is due to it being called a penalty. It is a penalty, but not in the traditional sense in that it does not result from filing a return late or making a tax payment late and it is not in addition to an existing liability. It is a penalty more in the sense that the IRS uses it to facilitate the collection of tax and enhance voluntary compliance.
The Trust Fund Recovery Penalty serves as an alternate means of collecting unpaid trust fund taxes as it is assessed against individuals but stems from business employment taxes. It is one of the few exceptions that allows the IRS to pierce the corporate veil and pursue collection action against individuals for a liability that originated from a corporation or LLC (or other forms of business entities that generally shield owners from personal liability).
Another confusing aspect of the TFRP for many taxpayers is understanding that the TFRP is not an additional liability on top of the 941-employment tax liability, but instead a portion of it. The IRS assesses the TFRP against the individual in an attempt to collect the liability quicker as the business presumably has one ability to pay and the individual has another. However, the IRS is not double collecting the liability, they are just collecting it from multiple sources in an attempt to collect it at a faster rate.
Internal Revenue Code 6672 allows the IRS to assess the TFRP against any person required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities. The penalty is equal to the total amount of tax evaded, not collected, or not accounted for and paid over. This means that if you are an owner, officer, check signer, or even just an employee that makes financial decisions at a business, you are at potential risk of being personally assessed the penalty.
The penalty as it relates to employment taxes is comprised of the amount withheld from employees’ paychecks that is not remitted to the IRS. It does not include later assessed late filing or late deposit penalties on the 941-employment taxes, interest that accrued for the delinquent payment of the 941-employment taxes, or the Medicare/Social Security employer matching portion of the 941-employment taxes. However, once the TFRP is assessed against the individual, interest will then accrue on the liability. The term trust fund recovery penalty was derived from the fact that the business withholds funds from an employees’ paycheck and then the business is supposed to hold those funds “in trust” to then be remitted to the Internal Revenue Service as part of the required employment tax payment.
The IRS can and typically does assess any “responsible” party who “willfully” fails to remit the withheld amount (trust fund portion) of the 941-tax liability to the government. A responsible person is defined by the IRS as someone who has the duty to perform, the power to direct the act of collecting the trust fund taxes, accountability for and authority to pay the trust fund taxes, and authority to determine which creditors will or will not be paid.
The term “willfully” in this context applies to a person who is intentional, deliberate, voluntary, reckless, and knowing, as opposed to just accidental. However, no evil intent or bad motive is required. To establish 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 TFRP “willfulness” element.
One particularly crucial factor of the TFRP assessment process to be aware of is that in general, the IRS has a three-year time frame to assess the TFRP against an individual. The three-year time frame commences April 15th following the quarter for which the taxes were due or the date the return was actually filed, whichever is later. There is no limitation period for assessing the TFRP on 941-employment taxes until a return is filed.
However, if a 941-employment tax return is never filed and the IRS prepares a substitute for return in which they estimate the liability on behalf of the taxpayer, or a false or fraudulent return is filed, or a return is filed in connection with a willful attempt to evade tax, then there are no statutory assessment time frame limitations. These provisions are just one of many reasons it is beneficial to ensure that all returns that are required to be filed are filed timely by the taxpayer.
Once the TFRP is assessed, because it is itself a penalty, it does not accrue additional penalties as would a typical tax liability. However, if it is not paid immediately after it is assessed, the penalty will start to accrue interest. The TFRP is not automatically assessed against an individual as an IRS agent, typically a Revenue Officer, must first be assigned to the business case. The Revenue Officer must conduct an investigation to determine who is responsible for not remitting the trust taxes to the government as more than one person can be a responsible party within a business.
In general, the Revenue Officer’s investigatory process first starts with what is called a 4180 interview. This is where the IRS agent will ask questions regarding your involvement with the business. You are not required to participate in the interview but if you believe that you are not willful and responsible, it is advisable that not only do you participate in the interview, but that you secure competent representation to assist you in answering the questions because your answers can be used against you to support the government’s case of assessing the penalty. This is particularly important given the fact that I have seen some unscrupulous Revenue Officers who will question individuals in a manner that is seemingly designed to elicit incriminating responses.
In addition to the 4180 interview, Revenue Officers will also request documentation to support their assessment case. These documents typically involve bank statements that include cancelled checks, articles of incorporation, and bank signature cards. If these documents are not provided voluntarily by the business, the Revenue Officer will issue a bank summons compelling the financial institution to provide them to the IRS.
Unfortunately, even innocent employees who do not have significant control of the business that they work for have been assessed the TFRP. I personally have worked a case where the IRS proposed the assessment of the TFRP against an administrative assistant of the business because the Revenue Officer determined that they had signed some checks and so, the IRS officer concluded, they were willful and responsible. This type of situation is extremely unfortunate as the administrative assistant was just following orders of her employer and doing her job.
It took a substantial amount of work and effort to protest the proposed assessment, but in the end, I was successful in preventing the assessment of the liability. There is no doubt in my mind that had the secretary not secured my representation, the substantial liability would have been assessed against her and involuntary collection action would have commenced (i.e. bank levies and wage garnishments) which would have been disastrous.
Consequently, employees who are heavily involved with a business, sign checks for the business, sign tax returns for the business, makes tax deposits for the business, loan funds to the business, or even if they are just the main point of contact between the business and the IRS should be aware of the potential risk of being assessed the TFRP and should take precautionary measures to minimize their exposure to the potential of being assessed.
The best way to protect yourself from the TFRP is to avoid the assessment in the first place. If you are an employee at a business where 941-employment taxes are not being paid, it is a good idea to make sure that you are not an authorized check signer for the business and to avoid participating in activities that may make it appear that you have some authority over whether the employment taxes are being paid. If you are an employee who makes payments for the business (including federal tax deposits), signs returns, or signs checks, I would recommend that you get it in writing that you are performing those tasks solely for convenience of the owner and only after receiving express authorization from the owner so you have documentation supporting the fact that you do not have independent authority to determine what business expense gets paid.
If the Revenue Officer believes the individual is willful and responsible and should be assessed with the TFRP, an IRS correspondence marked “Letter 1153” will be sent to the last known address of the individual. This is the official proposal for the assessment (not the actual assessment) and is a critical letter as it provides a 60-day time frame to protest the proposed assessment. Thus, if you receive the letter and believe that you are not responsible, it is imperative that you file a well-prepared protest within the 60-day deadline and retain verification that the protest was timely filed, because if you miss the deadline, you will be assessed and are generally not granted another opportunity to protest it.
I recommend that the protest be professionally drafted while citing legal authority that supports your arguments as to why you should not be assessed. Providing supporting documentation is also beneficial. Once a protest if filed, your case will most likely be forwarded to IRS appeals where an Appeals Officer may conduct a hearing to determine if the Revenue Officer made an error in assessing the TFRP against you. Due to the important nature of the protest, I highly recommend securing representation to draft a skillfully prepared protest and to conduct the appeals hearing on your behalf. This will increase the probability of convincing the Appeals Officer that the Revenue Officer made an error in their determination to propose assessing you.
If the appeals hearing does not go favorably and the Appeals Officer sustains the assessment, there are still a few, albeit more complicated means of attempting to reverse the assessment. One of these means is to file a timely petition to challenge the assessment in court. If the court sustains the assessment, then voluntary resolution of the tax liability will need to be secured to prevent the IRS from proceeding with involuntary collection action.
Various forms of voluntary resolution with taxing authorities are discussed in other Fortress Tax Relief articles, but they basically include Installment Agreements, Currently Not Collectible, and Offers in Compromise.
Additionally, in some cases, provided that the business secures a formalized Installment Agreement for the outstanding business tax liability, a qualified tax relief professional may be able to negotiate having the IRS refrain from pursuing collection action against the individual on the personally assessed TFRP. This is only a possibility if the business remains in complete tax compliance while maintaining the monthly payments that are due pursuant to the business payment agreement and the agreement will resolve all outstanding tax liability, including the TFRP within the remaining timeframe of the IRS’s collection statute.
Due to the complicated nature of the TFRP, I recommend securing competent advice and representation from a tax professional to provide assistance through the entire process.
If you have questions about a potential or existing TFRP liability or if you owe taxes and would like to learn about your tax relief options, pick up the phone and give us a call. We have caring and knowledgeable tax professionals who will be happy to answer any questions you may have and to outline a solution tailored to your specific needs and circumstances. There is no cost for a telephone consultation, so call Fortress Tax Relief today.
