Archive for Robert McKenzie

Trust Fund Recovery Penalty – #16 – Appeal Procedure (Final Post In Series)

TaxConnections Picture - Dollar Sign and Money16. APPEAL PROCEDURE

§ 5:82 In General

You must submit a written protest to the assertion and assessment of the Trust Fund Recovery Penalty. An oral protest is inadequate. No interest will accrue during the pendency of your protest Therefore, delays by the Internal Revenue Service in processing a protest usually are to the client’s benefit. Upon receipt of a protest, the Revenue Officer will prepare a rebuttal and submit the file through Special Procedures function (SPF) to the Office of Appeals. [IRM 5.7.6.1.3]

§ 5:83 Appeals Conference

The appeal is considered by the Office of Appeals, which also hears appeals on audit matters. Your client has the right to have a personal conference with an Appeals Officer. He or she may be represented by an accountant or attorney and present evidence and witnesses on his or her behalf. [See also Representation Before the Appeals Division of the IRS, another Tax Practice Workbook]

If you convince the Appeals Officer that your client is not a responsible person, he or she will recommend nonassertion of the Penalty. If you fail to convince the Appeals Officer, an assessment will be made by the Service without your client being granted the right to go to Tax Court. Read More

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Trust Fund Recovery Penalty – #15 – Defense Tactics

TaxConnections Picture - Dollar Sign and Money15. DEFENSE TACTICS

§ 5:75 In General

The practitioner’s goal in defending a Trust Fund Recovery Penalty is to remove the onus from one’s client and place it on some other person or in the alternative to limit the amount of liability. Literally, one of the best ways to protect your client is to use the “he did it” defense. Blame someone else!

§ 5:76 “He Did It” Defense

The “he did it” defense can first be asserted at the initial interview of your client. Be prepared to present documentation to support why another person bore ultimate responsibility for payment of the taxes. The best evidence may be affidavits from third parties and your client asserting that some other party was responsible.

§ 5:77 Protest

Upon receipt of the letter proposing liability, submit a protest in the format set forth on the back of the IRS letter. Even if your client is a responsible person and willfully failed to pay the tax, you may protest the computation of the tax. It is not unusual for the IRS to miscalculate the Trust Fund Recovery Penalty and you have the right to assure that the penalty is in the proper amount. Read More

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Trust Fund Recovery Penalty – #14 – Recommending Assertion of Penalty

TaxConnections Picture - Dollar Sign and Money14. RECOMMENDING ASSERTION OF PENALTY

§ 5:70 In General

Having completed a preliminary investigation, the Revenue Officer next prepares proposed Trust Fund Recovery Penalties against the persons whom he or she believes to be responsible persons. For this purpose the Revenue Officer prepares a report titled “Recommendation Re: Trust Fund Recovery Penalty Assessment.” The report calls for the Revenue Officer to determine whether to assert against each potentially responsible person. The Officer can decide not to assert against a responsible person if it is determined that the penalty would not be collectible from that party. (Since the Internal Revenue Service views the Trust Fund Recovery Penalty as a collection device, the author has found that the greater his client’s net worth, the less likely the IRS is to determine the client not to be a responsible person.)

§ 5:71 Notice To Taxpayer

The completed recommendation is presented to the Revenue Officer’s Group Manager for concurrence. Upon approval by the Group Manager, a Letter 1153 and Form 2751 (Proposed Assessment of Trust Fund Recovery Percent Penalty) are mailed to each potentially responsible person. The letter is mailed to the person’s last known address. That letter grants the taxpayer ten days to contact the Revenue Officer to present a defense, or the taxpayer may request an appeals conference within sixty days of the letter. The format for a protest is set forth on the reverse side of the letter. Read More

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Trust Fund Recovery Penalty – #13 – Information Gathering

TaxConnections Picture - Dollar Sign and Money13. INFORMATION GATHERING

§ 5:68 In General

Once, a Revenue Officer has determined the basic financial and organizational information about a company, he or she will begin gathering supporting documents. It is standard practice to summon the company’s banks for corporate resolutions, signature cards, bank statements, cancelled checks, and loan agreements. Revenue Officers will also seek copies of contracts, leases, and corporate minutes books. Normally at the outset of the investigation, the Revenue Officer will not have the corporate tax returns, but as the investigative process begins, he or she will request copies from the Service Center.

§ 5:69 Oral Presentations

Oral presentations on behalf of your client sometimes will prevent assertion. Always point out your client’s dire financial situation when appropriate since the Internal Revenue Service might give her a pass based upon uncollectibility. [IRM 5.7.5.3]

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Trust Fund Recovery Penalty – #12 – IRS Investigation Techniques

TaxConnections Picture - Dollar Sign and Money12. IRS INVESTIGATION TECHNIQUES

§ 5:64 In General

At any time after an employer fails to pay trust fund taxes, the IRS may begin investigating a proposed Trust Fund Recovery Penalty. It is standard practice for the Service to begin investigating any time a Revenue Officer discovers that a company owes taxes. Many times the Revenue Officer will begin the process when the company is still operating and has entered into a payment agreement with the Service. [IRM 5.7.4.8] If the payment agreement will be for more than 18 months, the potentially responsible officers must sign a statutory waiver to avoid assessment. [IRM 5:7.4.8] The Service views the Trust Fund Recovery Penalty as a collection tool and rightly believes that the threat of personal liability will cause the management of an operating company to maximize payments to the IRS. Such a policy can create severe management disruptions if corporate officers must try to juggle corporate financial problems, conflict to each other, and the potential for personal financial devastation if they are assessed a Trust Fund Recovery Penalty. In many areas, the Service will assess responsible persons and begin collection from the officers even though the corporation is still operating and making payments on its overdue taxes. [IRM 5.7.4.8]

§ 5:65 Interviews With Potentially Responsible Persons

The IRS normally begins its investigation Fund Recovery Penalty by interviewing corporate officers. The IRS utilizes an interview form titled “Report of Interview Held with Persons Relative to Recommendation of 100-Percent Penalty Assessments.” Upon review of the form you will note that the interview format takes two approaches: (1) the gathering of corporate financial and organizational information; and (2) the gathering of information relative to proving responsibility and willfulness. Read More

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Trust Fund Recovery Penalty – #11 – Computation Of Trust Fund Recovery Penalty

TaxConnections Picture - Dollar Sign and Money11. COMPUTATION OF TRUST FUND RECOVERY PENALTY

§ 5:61 In General

In proposing a Trust Fund Recovery Penalty, an IRS Revenue Officer will secure transcripts of all the unpaid tax periods of a corporation. The Officer will then complete a computation sheet. Revenue Officers are instructed to compute the proposed penalty in a manner most advantageous to the government. [Rev. Proc. 2002-26; Rev. Rul. 73-304, 1973-2 C.B. 42; Rev. Rul. 79-284, 1979-2 C.B. 83] As tax practitioners, our goal, obviously, is to compute the proposed penalty in a manner most advantageous to the client. In every case, recompute the proposed penalty. By reviewing the computation and IRS transcripts one can verify the proper computation of the penalty. Many times the Revenue Officer has failed to follow even the guidelines set out in the Internal Revenue Manual.

§ 5:62 Payments Applied To Accrued Interest And Penalties

Of particular interest is the position of the IRS that it may apply payments to accrued interest and accrued penalty prior to paying assessed trust fund taxes. The IRS computer does not apply payments in this manner on the corporate account. It only applies payments to accrued penalty and interest when all assessed tax penalty and interest has been paid. The computer does apply payments in the manner set forth in Appendix 5C when it is computing the Trust Fund Recovery Penalty. It is certainly arguable that the IRS should compute a proposed Read More

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Trust Fund Recovery Penalty – #10 – Direction Of Payments

TaxConnections Picture - Dollar Sign and Money10. DIRECTION OF PAYMENTS

§ 5:52 In General

One method of reducing the potential trust fund liability is to assure that the employer designates each payment made on account by placing a restrictive endorsement on the back of each check worded as follows:

“Direct to Trust Fund Portion of taxes only for the period ended for Corporation.” [IRM 5.7.7 & IRM 8.11.2]

§ 5:53 Designated Payments

The Internal Revenue Manual directs that the Service will follow the taxpayer’s direction of payments and states as follows:

“A designated payment is a voluntary one that the taxpayer has directed to be applied in a particular manner; i.e., a specific period, kind of tax, tax portion, interest, etc. Normally such direction will be followed by the Service.” [IRM 5.1.2.3]

§ 5:54 Contemporaneous Direction

The courts have consistently held that a designation made contemporaneously with a payment must be applied by the Internal Revenue Service in accordance with such direction. Therefore, if you make a designation on the back of the check, the entire amount must be applied toward the trust fund portion. The direction must be written, and the IRS need not honor an oral direction. Read More

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Trust Fund Recovery Penalty – #9 – Application Of Payments

TaxConnections Picture - Dollar Sign and Money9. APPLICATION OF PAYMENTS

§ 5:50 In General

I.R.C. § 7501 states that withheld taxes “shall be held to be a special trust fund interest for the United States.” The purpose of the Trust Fund Recovery Penalty provision is to collect from individuals only unpaid funds held in trust by the employer. Therefore, a practitioner must know how the Trust Fund Recovery Penalty is computed.

§ 5:51 Amount Of Penalty

The amount of the penalty is the amount of the trust fund. The trust fund is comprised of only the withheld taxes, i.e., withheld income tax and the employee’s share of Social Security tax. The trust fund does not include the employer’s matching share of the Social Security tax because those funds are not withheld from the employee’s wages. The employer’s share of social security taxes, and all penalties and interest, are corporate obligations that do not pass through as a personal liability to the individual. They are not required to be held in trust for the government and, therefore, should not be included in the amount of the Trust Fund Recovery Penalty. The author has found that the Service consistently miscalculates the trust fund portion, therefore, the practitioner must always verify the calculation of a proposed Trust Fund Recovery Penalty. See the “Computation Sheet” that is used by the Internal Revenue Service to compute trust fund portion.

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Trust Fund Recovery Penalty – #8 – Statute Of Limitations

TaxConnections Picture - Dollar Sign and Money8. STATUTE OF LIMITATIONS

§ 5:47 In General

Under the Code, a Trust Fund Recovery Penalty must be assessed within three years of the April 15th following the year during which the quarterly liabilities arose. [I.R.C. § 6501 (a), (b)(2)] For example, the penalty with respect to liabilities arising during 1985 must be assessed on or before April 15, 1989. If the return is filed later than the April 15th following the year during which the liability arose, the statutory period for assessment is three years from the date of filing. If the returns were prepared by the IBS pursuant to I.R.C. § 6020(b), the IRS contends that there is no statute of limitations. [LR.C. § 6020(b)]. The .Internal Revenue Service in the past attempted to argue that there is no statute of limitation for the § 6672 penalty. The Third Circuit, however, ruled that the statute of limitation provided in § 6501(a) does apply to assessments of § 6672 Liabilities.

§ 5:48 Extension During Appeal

If a written preliminary notice of proposed liability is mailed or delivered in person to a ”responsible person-‘ before the’ expiration of the statute of limitations for the assessment of the penalty, the statute will not expire before the later of:

(1) 90 days after the date the notice was mailed or delivered in person, or

(2) if there is a timely protest of the proposed assessment, 30 days after a determination on the protest. Read More

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Trust Fund Recovery Penalty – #7 – IRS Investigation Of Willfulness

TaxConnections Picture - Dollar Sign and Money7. IRS INVESTIGATION OF WILLFULNESS

§ 5:43 In General

Revenue Officers take a very ‘simplistic approach to willfulness. Generally, if the bank statements indicate that liabilities other than taxes were paid during the time of accrual, then all responsible persons are deemed willful. Such an approach ignores the requirement of knowledge of nonpayment inherent in the willfulness standard. There is seldom a corporation which did hot pay at least some other debt. The practitioner must, therefore, seek to establish that his client was unaware of the tax liabilities.

§ 5:44 Preparation Of Return

The IRS uses signatures on tax returns to rebut lack of knowledge. Signatures, however, are not always indicative of willfulness. If the duty to pay taxes is vested in someone other than the person who signs returns, the signature may merely have been a ministerial act without knowledge of the failure to pay the taxes. One of the author’s clients actually prepared the tax returns and the federal tax deposits for a corporation as part of his duties as corporate vice-president. The vice-president only later became aware that for several months the president held the federal tax deposits in his desk drawer. Soon after learning of the president’s action, the vice-president left the company. The vice-president prevailed on the issue of willfulness at an appellate hearing-because even though he prepared and signed the tax returns, he lacked the requisite knowledge to establish willfulness. Read More

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Trust Fund Recovery Penalty – #6 – Willfulness

TaxConnections Picture - Dollar Sign and Money6. WILFULNESS

§ 5:29 In General

The Internal Revenue Service must prove and establish a second element for liability under the Trust Fund Recover Penalty. That element is “willfulness.” A responsible person need not have failed to pay the taxes with a fraudulent or evil purpose. [IRM 5.7.3.3.2] That person must merely be shown to have knowingly and intentionally disregarded the duty to pay trust fund taxes to the IRS. “Willfulness” can be defined as follows:

An act is willful if it is voluntary, conscious, and intentional. [A responsible person acted willfully if he] knowingly used available funds to prefer other creditors over the Internal Revenue Service.

§ 5:30 Liability Requiring Personal Fault

The Trust Fund Recovery Penalty cannot be Asserted without a showing of personal fault. This is a penalty and the penalty is invoked only upon willful failure to pay a tax.

§ 5:31 Personal Fault

Some courts have redefined the definition of “willfulness” by stating:

Personal fault being a necessary element of willfulness, relevant evidence bearing on the element of personal fault may not be ignored. Read More

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Trust Fund Recovery Penalty – #5 – IRS Investigation of Responsibility

TaxConnections Picture - Dollar Sign and Money5. IRS INVESTIGATION OF RESPONSIBILITY
§ 5:22 In General

On February 2, 1993, the Internal Revenue Service amended its manual [IRM P-5-60] to provide as follows:

Responsibility is a matter of status, duty, and authority. Those performing ministerial acts without exercising independent judgment will not be deemed responsible.

In general, non-owner employees of the business entity, who act solely under the dominion and, control of others, and who are not, in a position to make independent decisions on behalf of the business entity, will not be asserted the trust fund recovery penalty. The penalty shall not be imposed on unpaid, volunteer members of any board of trustees or directors of an organization referred to in § 501 of the Internal Revenue Code to the extent such members are solely serving in an honorary capacity, do not participate in the day-to-day or financial operations of the organization, and/or do not have knowledge of the failure on which such penalty is imposed.

§ 5:23 Reasons For Changed Policy

Over the years, the IRS has unfairly asserted the Trust Fund Recovery Penalty against many individuals. The IRS adopted new policies on February 2, 1993, in an attempt to avoid some of the prior abuses of the penalty. The author has found that it is now easier to avoid assertion of the penalty against titular officers. In one case the IRS dropped its efforts to assert the penalty against the unpaid treasurer of a charity. Read More

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