IRS Debt Relief through Avoiding Assessment of the Trust Fund Recovery Penalty

One type of IRS debt relief that most persons are not aware is avoiding assessment of the Trust

When an employer pays payroll taxes to the government, the amount paid is actually made up of 2 parts. One is the portion that the employer pays. The other is withheld from the employees check. This amount is called the trust fund because it is considered held in trust for the employee. The taxes that make up the trust fund are Social Security taxes which include Medicare taxes and the employee's income taxes. When the employer fails to pay over those amounts, often due to a failing business, the IRS has the authority to assess personal liability for the taxes to persons they deem responsible. This personal assessment is called the Trust Fund Recovery Penalty (TFRP).

The trust fund penalty assessment only applies to payroll taxes of a corporation or LLC. This is because those entities normally provide personal liability protection to the owners. The purpose of the TFRP is to bypass that personal liability protection so that the government will be able to recover the trust fund taxes withheld from the employees wages if not paid.

The IRS Revenue Officers whose job it is to investigate and request the assessment are often very aggressive in going after as many "responsible persons" as they can. Generally persons who had signature authority on a bank account and who actually signed checks during the tax periods of the liabilities are targeted. Often times though a Revenue Officer will propose the assessment against anyone who could sign on the account whether they signed checks or not.

Those types of proposed assessments would not hold up in court and should not be ignored as the person has appeal rights which should be exercised within the allowable period.

The best way to avoid the Trust Fund Recovery Penalty is to pay the trust fund before it is assessed. Many times payroll taxes are not paid because the business is not generating enough cash flow to pay all it's bills. The owner thinking things will pick up makes the fatal decision to put off the payroll taxes and catch up later.

This rarely happens and the unlucky business owner and possibly his bookkeeper and/or spouse get a proposed TFRP assessment simply because they signed on a bank account out of convenience. The Internal Revenue Service does allow a business to make "designated payments" to a trust fund liability. There is a proper procedure for this and it must be done correctly.

The IRS does not really like people to do this and it is usually only done when a business is ceasing operations and there are few assets with which to pay the non trust fund portion of the payroll tax after the designated payment has been made. The business owner then walks away without any personal liability for payroll taxes even though the non trust fund portion may never be paid.

Many times when a business is experiencing hard times and is short on cash, the owner will pay the person who is screaming the loudest and not the one who can hurt him the most. The landlord will have to file a lawsuit and get a judgment to collect on past due rent. The IRS simply has to propose a Trust Fund Recovery Penalty Assessment and wait for the appeal period to pass. A judgment is dischargeable in a bankruptcy. The TFRP, being a penalty is not. The IRS can hurt you more than the landlord.

Making a designated payment for the trust fund taxes realistically only works for certain situations but it is worth looking at. It should only be done with the help of an attorney to insure it is done correctly and evaluate any other potential legal problems that may arise from choosing one creditor over another.

If you feel that you may be the target of aTrust Fund Recovery Penalty investigation and would like to talk to a tax attorney, click the link below.