Tag Archive for Robert McKenzie

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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Trust Fund Recovery Penalty – #3 – Responsibility And Willfulness

TaxConnections Picture - Dollar Sign and Money3. RESPONSIBILITY AND WILLFULNESS

§ 5:5 In general

When a corporation fails to pay taxes, the IRS may proceed against the persons responsible for the nonpayment. IRC § 6672 provides statutory authority for imposing a Trust Fund Recovery Penalty on “any person ‘required to collect, truthfully account for, and pay over collected taxes” Who willfully fails to collect such tax or willfully attempts in any manner to evade or defeat such tax or payment thereof. The Supreme Court has held that a responsible person did not have to be responsible for all three duties listed in the statue because such an interpretation would allow easy avoidance of the penalty by changing officers’ duties prior to the expiration of any quarter.

Generally, two conditions must be met in order to assess and collect the Trust Fund Recovery Penalty tax:

(1) The taxpayer must be a responsible person, and

(2) The taxpayer’s conduct must be willful

IRC § 6671 defines a “person” as anyone with a duty to perform. IRC § 6671(b) defines the term “person” to include “an officer or employee of the 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.” Read More

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Trust Fund Recovery Penalty – #2 – Requirements For Liability

TaxConnections Picture - Dollar Sign and Money2. REQUIREMENTS FOR LIABILITY

§ 5:3 In general

There are two major tests to determine if someone is subject to the provisions of IRC § 6672. They are primarily questions of fact and may be stated as follows:

(1) Whether the party against whom the penalty is proposed had the duty to account for, collect, and pay over trust fund taxes; and

(2) Whether he or she willfully failed to perform this duty.

During the course of this text we will extensively discuss these two tests and the manner in which the courts have interpreted them. In general, the Internal Revenue Service has the right to pursue any person who meets the tests, even if he was not an officer or employee of the corporation which originally collected the taxes. In fact, on many occasions the Internal Revenue Service has asserted the penalty against accountants and attorneys who were not employees of the collecting corporation.

§ 5:4 Assessment against several persons

The penalty can be assessed against more than one person. It is not unusual for the Internal Revenue Service to assess the penalty against several responsible persons. In the event that the IRS; assesses several persons, it may collect the entire liability from any of those persons. Although the Service has a policy of not attempting to collect more than the total amount of the withheld taxes [IRM P-5-60, dated February 2, 1993], it consistently errs and collects more than the penalty from the various officers. This occurs because the Internal Revenue Service has never Read More

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A Collection… The Humorous Side of Tax… (#11)

♦  Another celebrity with tax problems:  “William Shakespeare was a ‘ruthless businessman’ and tax dodger, researchers have claimed. Although he wrote plays that championed the rights of the poor and the needy, archived documents show the playwright was actually a wealthy landowner repeatedly dragged before the courts and fined for illegally stockpiling food and threatened with jail for evading taxes.” Daily Mail, 3-31-13

♦  What I do resent are stupid tax forms that are badly written and impossible to understand. I hope the IRS agent looking at my tax return understands I’m just kidding. Andy Rooney, Commentator on CBS 60 Minutes

♦  All Israel was “dismayed and terrified” [at Goliath’s challenge] and, not surprisingly, there were no volunteers until the young harpist and poet, David, stepped forward. Now why would he be that foolish? Because Saul promised that the man who slays Goliath will receive riches, the king’s daughter, and exemption from all taxes! “Riches” is a relative term that could mean anything, and we all know that most women were virtually chattel, a dime a dozen, in the Bible, so it had to be the tax exemption that drove David to risk his life! –Conrad Rosenberg

♦  Most of us treat the Internal Revenue Service as if it were an ancient and powerful god. We pay tribute through payroll deduction. We perform the annual ritual of the tax forms. We bring forth sacrifices and homage on its chosen day of April 15. We dread provoking its wrath. Jim Gallagher ST. LOUIS POST-DISPATCH 2-14-10 Read More

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A Collection… The Humorous Side of Tax… (#10)

♦ On tax day, it is good to remember a Charles Schultz a quote from the Peanuts comic strip: “No problem is so big or so complicated it can’t be run away from.”

♦ Two things in life are inevitable: death and taxes. We can’t say for certain when death will come. Tax day, however, is usually April 15, unless it falls on a weekend or holiday. Tracy Brunner, Standard-Examiner 3-12-12

♦ In this new, improved era, we can sweat over a computer keyboard and unfamiliar software program the night of April 15, then spill cold coffee into our computer, resulting in a shower of sparks and a small fire.— Steve Brewer  Albuquerque Tribune Columnist, March 30, 2006

♦ The IRS allows you to file for an automatic extension and file your return 6 months after the April 15 deadline. What if your doctor informed you that you that you had terminal illness and you were unlikely to live to April 15, but you could file for an automatic extension and be given to October 15?

♦ The doorbell, rings, and a man answers it. Here stands this plain but well-dressed kid, saying, “Trick or Treat!” The man asks the kids what he is dressed up like for Halloween. The kid replies, “I’m an IRS agent.” Then he takes 40 percent of the man’s candy, leaves, and doesn’t say thank you.

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A Collection… The Humorous Side of Tax… (#9)

♦  Q. What does it take to be a good tax professional?

A. Two things – grey hair and hemorrhoids. The grey hair makes you look distinguished and the hemorrhoids make you look concerned.

♦  A Washington tax lawyer goes to Texas to give a speech. He arrives at his hotel late and tired having undergone a strip search at Washington National after his pen set off the metal detector. After check-in at the hotel he goes down to the hotel bar for well-deserved nightcap. The tax lawyer ordered a shot of whiskey and the bartender brought him a 12 oz. glass of whiskey. He inquired: What is this? The bar tender responded: Everything is big in Texas. He drank the whiskey and since he was still not relaxed he ordered a beer. The bartender brought a 64 oz. glass of beer. Once again the tax lawyer asked: What is this? The bar tender again responded: Everything is big in Texas. The lawyer drank it. Now by this time the tax lawyer really needed to go to a bathroom so he asked for directions from the bartender. He was told go down the hall and turn left at the third door . Unfortunately the tax lawyer was a little tipsy from the shot and a beer and he turned right at the third door and  fell into the hotel swimming pool. He immediately shouted Don’t flush it!!!

♦  A few years ago, a lot of taxpayers invested in tax shelters to save taxes. The biggest problem with most tax shelters is that they leaked.

♦  Filing taxes is on par with going to the dentist or arguing with the DMV. It’s tedious, time-consuming and potentially expensive. FOX Business, Stephen Vanderpool, Nerd Wallet, 3-08-13

♦  The Joker on Batman: the Animated Series: “I’m crazy enough to take on Batman, but the IRS? No, thank you!”  From comment of Jim Gilbert, CPA Trendlines, 2-28-13

♦  Q:  What do accountants suffer from that ordinary people don’t?

A:  Depreciation.

♦  Unless we wish to hamper the people in their right to earn a living, we must have tax reform. — President Calvin Coolidge

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A Collection… The Humorous Side of Tax… (#8)

♦  It’s tax time. I know this because I’m staring at documents that make no sense to me, no matter how many beers I drink. — Dave Barry

♦  On April 15th you count your blessings . . . and then send them to Washington.

♦  We picked the wrong day for April Fool. I would have chosen April 15.  Steve Maple 3-27-09

♦  “Tax day is the day that ordinary Americans send their money to Washington, D.C., and wealthy Americans send their money to the Cayman Islands.” –Jimmy Kimmel courtesy of Barbara D’Amato

♦  But one must take pride in paying up every April 15. Look at it this way: If you don’t spend your dollars on the IRS, you’d probably just squander it on foolish things, like food, rent . . Cindy Adams, NY Post, 3-29-09

♦  April 15 is lurking around the corner, so if you have yet to file your federal tax return, it’s time to set aside a few hours, gather together your financial records, and flee the country. Dave Barry

♦  The good news for taxpayers is that the smartest tax experts don’t work for the IRS. They were smart enough to realize that taxpayers will pay more to keep their money than the government will pay to collect it.

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A Collection… The Humorous Side of Tax… (#7)

♦  What can we, as citizens, do to reform our tax system? As you know, under our three-branch system of government, the tax laws are created by: Satan. But he works through the Congress, so that’s where we must focus our efforts. Dave Barry, Column, April 6, 2003

♦  I think that one of the scariest letters one can receive is the one from the Internal Revenue Service. Greg Roberts, Aiken Standard, 3-3-13

♦  The chaplains who pray for the United States Senate and the House of Representatives might speak a word now and then on behalf of the taxpayers.

♦  When the time comes for the meek to inherit the earth, taxes will most likely be so high that they won’t want it.

♦  A man dies and goes to hell and is shocked to see his former tax lawyer entwined with a beautiful woman while everyone else roasts in eternal flames. So he calls over the nearest demon and asks how come the tax lawyer gets a girl while he just gets fried. The demon glances over and shouts “Who are you to question that woman’s punishment?”

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