Anyone who employs workers under W-2 guidelines has an obligation to withhold taxes from the employee paychecks and turn those funds over to the State and Federal Government. When that process breaks down and the funds are not paid to the respective taxing authority, the owner and/or those responsible for overseeing the process are susceptible to personal assessment by the taxing authorities for the taxes due. As with all tax-centric processes, the States have their own guidelines and practices that are followed, but they generally follow the same pattern set by the Internal Revenue Service.

The most important question asked about the Trust Fund Recovery Penalty is why do the taxing authorities personally assess responsible individuals? Quite simply, the IRS and States are protecting their interests. There is a debt that is owed to them that must be repaid. By holding individuals personally accountable for the taxes withheld from employee paychecks not yet paid over, the taxing authorities are leveraging the resources they can tap to address the debt quicker. If a taxpayer is either unable to repay that debt, or in some cases unwilling, the taxing authorities will look to seek repayment from the individuals associated with the collecting, accounting, and issuance of payroll. Responsible individuals are classified as the following:

• An officer, director, shareholder, or employee of a corporation.
• A partner or employee of a partnership.
• A board member for nonprofit organizations.
• Any individual responsible for financial decisions.
• A corporation or third party payer.
• An individual or individuals of a Payroll Service Provider or Professional Employer Organizations or the provider as a whole.

The process of how the Trust Fund Recovery Penalty assessment is determined follows several steps. Here is how the IRS process occurs…

With the accrual of a withholding tax debt as reported on Form 941, the IRS’ Automated Collection System will begin issuing notices in an attempt to collect the debt. Though there is no definitive line observed or followed by the IRS, generally speaking, once a business accrues over $100,000 in past due taxes owed, the case is flagged to be assigned to a field agent, also known as a Revenue Officer. The Revenue Officer is assigned to the case based on geographic location to allow for ease of face-to-face meetings, to conduct drive-by observations of assets, to issue notices or demands for information/documentation in person, etc. Once assigned to the case, the Revenue Officer’s primary job is to stop the accrual of any new tax debt and collect the taxes, penalties, and interest assessed on the account as quickly as possible. Recently, the IRS established a protocol banning unannounced IRS visits over safety concerns for the agents, but that will not stop a Revenue Officer from following through with a visit once the taxpayer has been advised it is planned.

The assigned Revenue Officer will always handle the Trust Fund Recovery Penalty on behalf of the IRS. Below are the steps the Revenue Officer takes to whittle down the reputed field to those who could truly be held accountable:

1. The assigned Revenue Officer will request financial documentation from the business, such as bank statements, copies of canceled checks, etc. This documentation is requested to determine how the business’ money is spent, and who is involved with the financial management of the business. If the Revenue Officer is unable to receive information or documentation directly from the taxpayer, he/she will begin issuing subpoenas demanding financial information from banks and any other relevant third-party sources.
2. Upon receiving the documentation, the Revenue Officer will make an assessment of who is involved with the business’ official financial records. The Revenue Officer will contact each of those individuals to conduct an interview to explore further their involvement with the financial decisions of the business, and to identify who else may be culpable. This interview will include a series of questions to help determine if the individual was aware of the tax debt accrual and the tasks and duties the individual fulfilled related to the business's financial affairs. Based on the answers secured during the interviews and the supporting documentation gathered by the Revenue Officer, all possible responsible parties are identified.
3. The Revenue Officer will issue Letter 1153 to the individuals deemed by the Revenue Officer to be involved with the accrual of the tax debt; as such, the IRS proposes an assessment of the Trust Fund Recovery Penalty against them. This notice will provide the individual a summary of all tax periods and related Trust Fund balances they will be held accountable for and instructions on filing an Appeal if they disagree with the proposed assessment. Suppose there is no basis for an Appeal as it is evident the individual is genuinely responsible for the accrual of the withholding tax debt. In that case, the Trust Fund Recovery Penalty will be personally assessed.

Now, if there are multiple individuals personally assessed the Trust Fund Recovery Penalty, the assessments are in conjunction with each party, not in addition to. For example, let’s say that a business owes $70,000 in trust taxes related to unpaid withholding taxes owed to the IRS. And let’s assume that after the Trust Fund Recovery Penalty concludes, the IRS identifies three individuals who were all deemed responsible for the tax debt accrual. Though each is assessed $70,000 in total, as payments are received by the business or any of the three deemed responsible, the $70,000 balance lowers on all three personal assessments.

If the prospect of tending to this type of situation causes a cold sweat or sleepless nights, reach out to the Golden Lion Tax Solutions team. We have decades of experience handling these types of situations and have found successful resolutions to every case that has gone through the Trust Fund Recovery Penalty process.

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