11. 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 Trust Fund Recovery Penalty using the same application of payments that it normally used for application to the employer account. The author has been unable to find any court cases which specifically give the IRS the right to apply pay merits contrary to its computer system. On the other hand, there are no cases forbidding such action.

§ 5:63 Application Of FTDs

One important area of note on the IRS Application Rules is that the taxpayer is entitled to have the Federal Tax Deposits (FTP) applied only to tax. Such payments may not be applied to penalties and interest. Many times Revenue Officers improperly apply such payments to penalties and interest. The taxpayer should request timely FTP’S applied to trust fund and non-trust fund taxes on a pro rata basis. Many times Revenue Officers attempt to prospectively apply FTD’s to subsequently accrued nontrust fund taxes. Courts have found that the IRS may not prospectively apply FTD’s or payments. At least one court has found that the IRS must apply FTD’s pro rata between trust fund and non-trust fund taxes. The IRS is not entitled to apply a corporation’s excess tax deposits for one-quarter to the penalties for that quarter. The IRS is required to apply the tax deposits to subsequently accrued taxes in the following quarters. The IRS was not entitled to apply the surplus tax deposits to a penalty that had not yet matured at the time a company made its tax deposits. [See § 5:55 of this work]