The IRS will hold individuals in a company personally liable for trust fund recovery penalties. The IRS will conduct an investigation to make this determination. This blog discusses the factors the IRS evaluates during the investigation to determine the individuals considered a “responsible person” for trust fund penalties.
Read blog “Trust Fund Penalty – What is it?” for more information on the definition of trust fund recovery penalty.
Please note that when reviewing this information, more than one individual in a business can be considered a “responsible person.” For example, the owner, manager of operations, and bookkeeper could all be assessed trust fund penalties.
When a business owes unpaid payroll taxes, the IRS may assess individual(s) in the organization trust fund recovery penalties. The IRS will start an investigation to determine who is a “responsible person.” The IRS does this by assigning the case to an IRS revenue officer. The revenue officer assign to the case typically resides close to the business address. The revenue officer will request in-person interviews with individuals associated with the business. The individuals interviewed could be owners, board members, shareholders, employees, bookkeepers, accountants, and even lenders. The following are the actual code sections for determining a “responsible person.”
By definition of Code Sec. 6672(a), Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for an pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
A “responsible person” is defined in Code Sec. 6671(b), the term “person”, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.
When determining who is a “responsible person”, the IRS will generally evaluate several factors, including whether the individual
1) is an officer or member of the board of directors;
2) owns shares of the business;
3) is active in the management of day-to-day activities of the business;
4) has the ability to hire and fire employees;
5) makes decisions on which debts or taxes to pay;
6) controls bank accounts; and
7) has check signing authority.
The revenue officer will ask questions to determine if the individual meets any of the factors. The revenue officer will make a determination whether an individual is a “responsible person” based on one or a combination of factors. If the individual does not agree with the determination, the individual will have the right to appeal the determination.
If you are held liable for trust fund penalties and need help, call ALG Tax Solutions 855-MI-Tax-Help (855-648-2943) or provide your contact information online. We can evaluate your situation to determine if the IRS rightfully assessed trust fund penalties.
IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.