Back Payroll (941) Taxes and Trust Fund Recovery Penalty

If you are behind on payroll tax and not sure where everything stands with the IRS, as licensed tax practitioners, we can perform a free confidential check-up with the IRS to confirm status of all issues (on the business and on your personal side) to effectively determine where you are and the steps that need to be taken to ensure you get through these issues in the very best manner possible. Once the review is complete, you can decide if you want our help. Either way, you will finally know what can be done and not be left feeling like you have no idea where to turn or what to do to protect yourself and your business.

Payroll taxes are a special kind of tax -- what is referred to as a "Trust Fund" tax -- where an employer collects tax on behalf of the government by withholding from employees' pay in "trust" that the tax withheld will be deposited to the US Treasury.

If these deposits are not made, the IRS will actually assess you personally to collect on all tax withheld from employees' pay that was not deposited. You do have a right to an interview before this assessment to determine if you are a willful and responsible party for the non-payment of tax, but if you are an officer or owner of the business, we strongly caution you to get assistance before it is too late.

If you are at a point where you are behind on payroll tax but not yet to the point where the IRS is pursuing action against you, you can avoid all of the headaches if the proper steps are taken.

Trust Fund Recovery Penalty

What Is the Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty (TFRP) is any tax that you hold "in trust" to be paid to the government. For example, if you have employees, you withhold money from your employee paychecks to pay their taxes to the IRS. You might also collect sales or excise tax when you sell goods and you are holding this sales or excise tax to then be deposited over to the government. In short, you act as the collector of the taxes and it is your responsibility to turn the money over to the government by certain deadlines. If you fail to do so, the government will view this as just a notch below robbery -- you collected their money but did not actually give it to them.

That is the exact reason that the IRS and many states have the Trust Fund Recovery Penalty. Whoever is holding the money or spent the money must be held accountable for paying the government back what it was owed. If one of your employees gets a tax refund at the end of the year from the IRS, the IRS is obligated to pay your employee that money, even though the IRS never actually received the tax money. The IRS loses a lot of money on the deal, and they are going to go after whoever they can to collect on this debt.

Can the IRS Collect Against You Personally?

The Trust Fund Recovery Penalty allows them to do just that. They assess you personally for the Trust Fund portion of the taxes. Keep in mind a payroll liability has four parts: your employees' income tax (Trust Fund), your employees' Social Security and Medicare (Trust Fund), the company matching contributions to Social Security and Medicare (not Trust Fund), and penalties and interest (not Trust Fund). So if the company was to go bust and you were left to pay the bills, the penalties, interest, and matching contributions would go away and you are only personally on the hook for the Trust Fund portions.

Who Can the IRS Hold Personally Responsible?

The IRS is going to try and assess anyone they determine to be the "willful and responsible person."

The willful person is whoever was in charge of paying the taxes and willfully chose not to pay them. The IRS defines willful as "intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental" but stresses that no evil intent is required. They do not need to show that there was a conspiracy to not pay the taxes, just that it was a conscious and knowing decision. They need to show that you were aware, or should have been aware, of your tax obligations.

The responsible person is usually determined by status or position. If you are the owner of a business you are, ultimately, responsible for the taxes. The old leadership saying is that "you can delegate authority but not responsibility," and this is true with the taxes too. But successful arguments have been made if that authority was delegated to someone else and they hid the fact that the taxes were not being paid.

In general the IRS is going to look for who had control over the finances, check signing authority, who decided which bills were paid and not paid, and who collected the taxes.

Between willfulness and responsibility, there could be many people who the penalty is assessed against. It can be used against business owners, accountants, bookkeepers, and others. The key is that the IRS has to show both willfulness and responsibility. One out of two is not good enough. A successful defense is going to try to disprove one or the other, or sometimes both.

If you have questions about your particular case and the kinds of solutions available to you, contact us and we will outline a very specific strategy to ensure the optimal outcome.

Form 4180 -- Trust Fund Interview

What Is the 4180 Trust Fund Interview?

The entire purpose of this interview is to enable the IRS to find out if you were willful and responsible, and to find some other names of people that they may be able to implicate as well. They are trying to dig up as much information as they can, and like most things involving the Trust Fund Recovery Penalty, we recommend that you bring an attorney to this meeting.

Each person being interviewed will be asked the same series of questions and these responses will be recorded by the Revenue Officer. The Revenue Officer will conduct the interview in person or over the phone on an individual basis as each person must give their own answers. This allows the IRS to compare these answers to help determine who is ultimately responsible. Sometimes only one person might be liable and other times it could be every single employee.

If you are being interviewed, it means that a Trust Fund Recovery Penalty is at least being considered by the government. In reality, it probably means that it will be assessed unless you can put up a defense right then and there and convince them that you were either not willful, not responsible, or neither of the two. This is where we need to start prepping for the resolution of the actual assessment. The interview is not the end of the world -- it is just the starting point in this process, and what happens from here on out will be absolutely critical.

How Do I Know If the IRS Is Considering Me Liable?

The IRS has a form specifically used to determine "willfulness and responsibility": Form 4180 -- "Report of Interview Held With Person Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Tax."

If your Revenue Officer ever asks for a meeting with you and starts asking things like "Do you have check signing power?", "Does anyone else have check signing power?", "Did you hire or fire employees?", "Did anyone else hire or fire employees?" -- you are being interviewed to determine if an assessment can be issued against you.

Who Can Be Interviewed?

The purpose of the interview is to enable the IRS to determine who was responsible for the non-payment of the taxes. When a business has delinquent payroll taxes, the IRS is required to conduct this 4180 interview to identify each and every member of the business who could have been responsible for withholding taxes from employees' pay, making quarterly tax deposits, and making the financial decisions on behalf of the business.

The IRS will almost always request interviews from anyone listed as a corporate officer, partners, bookkeepers, secretaries, shareholders, and even someone who simply has check-signing authorization for the business.

Do I Have to Participate in the Interview?

Yes. If you do not participate in the Trust Fund Interview, you will likely receive a Summons to meet with them and this can result in being forced to disclose documentation that far exceeds what could be required via the simpler interview.

At the same time, if you refuse to conduct the 4180 interview, the Revenue Officer will automatically assess you with a Trust Fund Recovery Penalty as you were not able to argue that you were neither willful nor responsible for the non-payment of these payroll taxes. You may even be held more liable than if you would have just gone through with the interview.

Can We Handle the Interview on Your Behalf?

Unfortunately, you cannot have someone do the interview for you. However, we always recommend that we are present at the meeting or are on the line for a conference call so we can advise as to what you must answer and what you are not required to answer. We can never answer questions for you but we can coach you ahead of time and even intervene whenever the Revenue Officer is overstepping their authority. The best approach is to be prepared prior to the interview and to allow us to provide good preparation so this is a non-invasive process.

Form 2751 -- Proposed Assessment of Trust Fund Recovery Penalty

What Is the Form 2751?

If, through the 4180 Trust Fund Interview, you have been considered to be responsible for the non-payment of tax, you will receive a notice from the IRS that will consist of two parts. The first part will be an IRS Letter 1153 (DO), which is simply a notification that you have been deemed responsible and that you have 60 days to protest the proposed Trust Fund assessment.

The proposed Trust Fund assessment will be attached to the last page of the Letter 1153 (DO) -- this is the Form 2751.

What Is Contained in the Form 2751?

The proposed assessment will disclose the name of the person being assessed, the type of tax that has caused this Trust Fund assessment (typically 941 payroll tax), and the amount of penalty the IRS has assessed against you as a result of the non-payment of this tax.

This form is simply a "proposed" assessment and you have 60 days to protest if there are grounds for such a protest. If there is no way to avoid the assessment, it is often times beneficial to just sign the Form 2751 so you can move directly into the resolution phase of this process.

Are You Required to Sign the Form 2751?

No, you are not required to sign the Form 2751. If you have a defense and we can show you were either not willful or not responsible for the non-payment of tax, then do not sign this form. We can then submit a formal protest to the Revenue Officer within the 60-day protest window. Be careful -- this 60-day clock is based upon the date that appears on the Letter 1153.

If you do not sign the Form 2751 and you do not issue a formal protest within the allotted window, the proposed assessment will automatically be assessed against you and collection efforts can then start being enforced soon thereafter.

The Trust Fund portion includes employees' income tax and employees' Social Security and Medicare withholding. The company matching portions are not Trust Fund and cannot be assessed against the owners personally. Additionally, any penalty and interest that has accrued on the corporate tax accounts is not Trust Fund and cannot be assessed against the owners of the company.

IRS Letter 1153 (DO)

The letter will be dated and you have 60 days from that date to respond. You are given three choices:

1. Sign the enclosed Form 2751, agreeing to the assessment.
2. Do nothing, which is basically the same as pleading "no contest" (the IRS calls it "unagreed"). After the 60-day deadline, if you have not responded, you will be assessed.
3. Fight it: the letter will contain instructions on the correct format of your protest. There are two formats -- a "Small Case Request" and a "Formal Written Protest." If any period has a Trust Fund balance higher than $25,000, you must use the long format. It does not matter what the total balance is, just what the highest balance in a single period is. Otherwise you use the short format.

How Can I Protest the Assessment?

If we are protesting the assessment, we will need to include arguments relating to willfulness and responsibility. We would send this protest directly to the Revenue Officer who issued the 1153 letter once it is complete and as buttoned-up as possible.

If our protest persuades the Revenue Officer to change their mind, then we are done, although this does not happen often. Once you are this far along, the Revenue Officer is very likely going to assess you. We would advise you as to whether there are grounds for a defense so time is not wasted and can be spent on more important steps in this process that will actually benefit you.

Appeals Rights

If we do have a strong case to protest the assessment, we always recommend including a request at the end of your protest that states you want the case forwarded to the Office of Appeals if the Revenue Officer still plans to assess the penalty. You also have the option of contacting the Revenue Officer and making an informal agreement to prevent the assessment, but make sure that the 1153 is properly withdrawn.

A final note on Appeals: the Trust Fund Recovery Penalty will not be assessed until your appeal is heard, no matter what. The workload of the Office of Appeals typically goes in this order of priority:

1. Collection Appeals (which must be heard within 48 hours of receipt, so they are always first priority)
2. Collection Due Process Appeals
3. Trust Fund Recovery Penalty protests

Right now the IRS simply does not have the manpower to deal with Appeals in an efficient manner, so a lot of the time just filing your protest with the Office of Appeals will delay the Trust Fund Recovery Penalty. There will be some delay, and it can buy valuable time.

Delinquent Payroll Taxes (941 Tax)

How Can I Resolve Back Payroll Taxes?

If behind on payroll taxes, it is important that you fully understand what you are "required" to disclose versus what the IRS "wants" you to disclose if you want to protect yourself from aggressive collection efforts. Often times, they will request information you are not required to disclose as a tactic to escalate collection efforts. You are not able to reverse information that has already been shared, so please be careful. We can assist you in understanding all of this.

Like any resolution with the IRS, resolving back payroll taxes means that your company needs to get a formal resolution in place such as a payment plan, an offer in compromise, or have your accounts placed into currently not collectible status. By establishing a formal resolution, you ensure that the IRS will not take aggressive action against your company to collect the taxes such as bank account levies, accounts receivable levies, and seizures of property.

Why Should I Be Concerned About Unpaid Payroll Taxes?

The Department of Treasury is reliant upon all taxes that are withheld from employees' pay on W-2 income to be deposited to the IRS as these funds are what are used to keep different government divisions funded. Whenever you have W-2 employees, you will deduct not only federal and state income tax but also Social Security, Medicare, and unemployment. If you then keep what was withheld and do not deposit these funds to the IRS, the government will view this as theft as you held onto money that did not belong to you or your business.

In the court of public opinion, these are examples of why the IRS must hold you accountable:

1. Many W-2 employees file returns and receive refunds each year. The IRS never received the tax money that was withheld, yet the employee is entitled to receive a refund because they actually did have the funds withheld from pay.
2. The IRS did not receive the Social Security or Medicare contributions that were withheld from employees' pay, and these funds are what are used to fund other taxpayers' benefits.
3. The failure of one business to pay their payroll or corporate taxes can create an unfair business advantage over other businesses who are meeting their tax obligations.

This is why the IRS will actively pursue the Trust Fund Recovery Penalty assessment against any officers of the business or anyone who is considered willful and responsible for non-payment of tax.

What Do I Need to Do to Put a Formal Resolution in Place?

On the surface, handling a back payroll issue is similar to any other delinquent tax issue. Before you can propose any kind of resolution with the IRS you must:

• Start Paying Your Current Tax Deposits on Time -- You cannot enter into any arrangements with the IRS for back payroll taxes until you are making your current tax deposits on time. This is because the IRS wants to ensure that paying your taxes will not be a problem in the future.
• File All Missing Tax Returns -- If you have any tax returns that have not been filed and that are past due, you must file these returns before the IRS can consider any arrangement to resolve your debt. The IRS forces you to do this to get you back into compliance and to ensure that any agreement they make with you covers all of your tax debt.
• Complete a Financial Statement -- The IRS will require your business to complete a full financial statement disclosing all of the assets, liabilities, income, and expenses of the company. They use this financial statement to determine what kind of monthly payment they will require from you. It is critical that you truly understand what is required to be disclosed versus what you should avoid volunteering.

Failure-to-Pay / Failure-to-File Penalties

What Are the Penalties for Delinquent 941 Payroll Taxes?

You can be hit with 3 different types of penalties if you fail to file, fail to pay, and fail to keep up with your timely tax deposits.

1. Federal Tax Deposit (FTD) Penalty -- This will be charged against you if you are not current and if you fail to use the EFTPS (Electronic Federal Tax Payment System) to pay these FTDs. The most common error that business owners make is failing to keep current on all quarterly tax deposits. The magnitude of the FTD penalties is based upon the severity and how late the deposits were made:

• 2% -- deposits made 1 to 5 days late (yes, even if one day late)
• 5% -- deposits made 6 to 15 days late
• 10% -- deposits made 16 days or more late, but on or before the 10th day after the date of the first notice sent asking for the tax owed
• 10% -- deposits made to an unauthorized financial institution, payments made directly to the IRS, or paid with your tax return
• 10% -- amounts subject to electronic deposit requirements but not deposited using EFTPS
• 15% -- amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due, or the day on which you receive notice and demand for immediate payment, whichever is earlier

2. Failure to File (FTF) and Failure to Pay (FTP) -- These are a combined penalty. The IRS charges a combined penalty of 5% of the unpaid tax for each month (or part of a month) the return is late. This 5% consists of 4.5% for filing late and 0.5% for paying late. This does not sound too bad until you begin to tack on the additional 0.5% penalty for each month it is late. Sometimes, you have a total FTD/FTP/FTF penalty that is 50% of your total debt. The good news is that the FTF and FTP penalties will max out at 25% each, so it cannot be limitless accruals.

Do I Need Professional Representation?

It is strongly advised that you seek professional representation if you are behind on payroll tax, as the IRS is much more aggressive in pursuing delinquent payroll tax than any other form of tax. There is also a very good chance that a Trust Fund Recovery Penalty is out there waiting to be assessed. It is best to be as proactive as possible throughout all phases in this process.

You are going to be ok and we can save your business and protect you as an individual. There is just a process that needs to be taken to get you there. Download our free IRS Payroll Tax and TFRP Guide to learn more.

3 Steps to Successfully Resolving Payroll Tax Issues

Step 1 -- Understanding of Issues

Call us so we can discuss your tax issues. We want to know the type of tax issues you are having and if you have received any recent IRS Notices. This will allow us to evaluate your best options in resolving your tax debt with the least amount of financial burden possible.

Step 2 -- Confidential Check-Up

We will conduct a free "behind-the-scenes" checkup on your behalf to uncover everything that needs to be known about where things stand with the IRS. This allows us to provide a complete evaluation and to ensure you are provided with feedback you can trust. We will be able to see where things stand with the business as well as confirm what your status is personally.

Step 3 -- Confirm Candidacy

We review your candidacy for all resolution options and make sure you are advised of the type of outcome you can expect if everything is handled properly and within your rights as a taxpayer. You will have all the information you need to finally make informed decisions.

What Are Your Resolution Options?

We handle all IRS-related tax issues and our defined area of specialization allows us to implement whatever strategy is best suited to your particular set of circumstances. We will outline a very specific plan that will include the following:

• Personal Offer in Compromise (Doubt as to Collectability) settlement
• In-Business Offer in Compromise settlement
• Negotiation of an Installment Agreement (with or without financial disclosure)
• Negotiation of a formal request for Abatement (forgiveness) of Penalties
• Effectively eliminate tax debt through utilization of 10-year collection statute
• Protest of personal tax assessments for business tax debt
• Application for Discharge or Subordination of Federal Tax Lien
• Negotiating for file to be put in Currently Non-Collectible status
• File for Request of Lien Withdrawals once probationary payments have been made
• Innocent Spouse claim

We will also prepare and file any missing tax returns to ensure filing compliance -- this includes confirming what years need to be filed and obtaining all income information directly from the IRS.

Call us at (866) 573-3755 or request a free consultation to get started. There is no risk and no obligation.