Many businesses are operated through a legal entity that affords the owners of the business limited liability. Yet, business owners that are active or involved in their business are still at risk of personal liability for certain tax obligations of the business.

A prime example is the federal trust fund recovery penalty (“TFRP”). The IRS can impose the TFRP (i.e., personal liability) on any “willful” failure by a “responsible” person to pay the IRS federal “trust fund” taxes. The IRS must find that the individual is both “responsible” and “willful.”

Generally, trust fund taxes are those taxes that are collected from employees and held in trust for the United States. Trust fund taxes include, but are not limited to, federal income tax withholding and employment tax withholding (i.e., one-half of FICA).

A business might be going through a tough period and someone decides that the payments to the IRS will have to wait. Thus, even if a business is unprofitable, unpaid payroll taxes can accrue to very large sums. It happens all the time. This can create financial peril for both the business and for responsible persons.

Not only are business owners at risk. Any individual that has status, duty, and authority to control the business’s finances is at risk. As a result, business owners, officers, directors, managers, and even bookkeepers/accountants can and have been held personally liable through the TFRP.

Depending on what stage you are in the TFRP process, I can assist you with handling the TFRP investigative interview (i.e., Form 4180), appealing the proposed assessment (Letter 1153(DO)), challenge the assessment, and/or dealing with IRS collections.

IRS’s Decision (Letter 1153), Appeal Rights, and Court Challenge

What is Letter 1153(DO)?

After the IRS agent has complete the investigation, the agent will determine if one or more individuals should be assessed the TFRP. The IRS agent will send a Letter 1153(DO), via certified mail (or hand delivery), notifying the individual that the IRS agent proposes to assess the TFRP against the individual. An attachment to Letter 1153 (DO)–Form 2751-Proposed Assessment of Trust Fund Recovery Penalty–specifies the amount of the penalty and the tax periods at issue. Letter 1153(DO) will also provide a summary of the individual’s appeals rights, an opportunity to agree to the proposed assessment, and additional information regarding the effects of filing bankruptcy.

Can I appeal the IRS decision in Letter 1153?

Yes. The recipient of a Letter 1153(DO) has 60 days to protest the proposed assessment. If you do not protest within 60 days, then you lose your right to a hearing with IRS Office of Appeals.

The protest is heard by IRS Office of Appeals, which is an independent unit within the IRS that hears tax disputes. The hearing is an informal, administrative process that is usually conducted over the phone between the individual (or the individual’s representative) and the IRS Appeals officer.

What happens if I disagree with IRS Appeals decision?

The IRS Appeals decision is not subject to judicial review. Instead, a taxpayer must either file a refund suit in US District Court or the Court of Federal Claims. Although the TFRP assessed may be quite sizable, the individual can usually pay a smaller portion of the underlying tax in order to obtain jurisdiction in federal court.

What if I missed the deadline to appeal the IRS determination in Letter 1153?

The individual can institute a refund suit in federal district court, challenge the assessment in bankruptcy court, or file an offer in compromise – doubt as to liability.

What if I never received Letter 1153?

If you can demonstrate that the IRS never issued Letter 1153 or they mailed it to the wrong address, then a potential additional avenue to challenge the TFRP assessment through a Collection Due Process (“CDP”) hearing. But, if the IRS sent Letter 1153 to your “last known address”, then the IRS is deemed to have satisfied its notice requirement and you generally cannot challenge the assessment in CDP hearing.

Overview of Responsible and Willful

Who is considered a “responsible person”?

An individual is a responsible person if they are someone who has the “status, duty, and authority” that provides the individual significant control over the business’s finances.

IRS policy states that individuals that perform ministerial acts without exercising independent judgment will not be deemed responsible. But, the test is a facts and circumstances test. The test is often liberally applied by IRS agents to find that an individual is “responsible.”

The IRS looks for individuals that meet one or more of the following criteria:

Are officers, directors, or shareholders of the corporation
Hire and fire employees
Exercise authority to determine which creditors to pay
Sign and file the excise tax or employment tax returns, such as Form 941, Employer’s Quarterly Federal Tax Return
Control payroll/disbursements
Control the corporation’s voting stock
Make federal tax deposits

What is does “willful” mean?

The definition of “willful” in the context of TFRP is not the same as in the context of criminal tax cases. Willful does not mean that the individual had an evil intent or bad motive.

Rather, willful means intentional, deliberate, voluntary, or reckless; it means more than accidental. As a result, the IRS generally must show that the responsible person knew, or at least should have known, that the business was failing to pay over trust fund taxes to the IRS and other creditors (including employees) were paid instead of the IRS.

What if there are other “responsible” parties?

The TFRP is derivative of the businesses tax liability and more than one individual can be assessed the TFRP for the same underlying tax obligation. But, IRS policy states that the IRS can only collect the tax once. Thus, if the IRS secures payment from the business or from another person that was found to be liable, then the other parties are no longer liable for the tax/TFRP.

Statute of Limitations, Collections, and Miscellaneous

How long does the IRS have to assess the TFRP?

The statute of limitations for the assessment of the TFRP is based upon the deadline for filing the tax return associated with the underlying tax. For example, the IRS generally has three years form the filing date of the Form 941- Employer’s Quarterly Federal Tax Return to assess the TFRP related to the failure to pay the taxes associated with the Form 941. But, for Form 941, the “filing date” is deemed to be April 15th of the year following the period covered by Form 941 (e.g., the SOL for Form 941 for 1st quarter of 2015 would be April 15, 2019). Keep in mind that certain actions may toll the statute of limitations. And, if no return was filed, then the statute of limitations is open.

If the TFRP is assessed, how long does the IRS have to collect the balance?

Generally, the IRS has 10 years from the date of assessment to collect the TFRP. However, the statute of limitations may be tolled (i.e., extended) by certain actions. Generally, these tolling events are actions that preclude the IRS from taking collection action (e.g., proposing an installment agreement or submitting an offer in compromise).

Can I recoup payments of the TFRP from other parties?

Potentially. Even if you are held to be personally liable for the TFRP by the IRS, you may not bear the full weight of the tax obligation under business law or contract law. For example, you might have a right of contribution via corporate by-laws, partnership agreement, LLC operating agreement, or employment agreement. However, this may provide little relief if the other party does not have the wherewithal to pay on their obligation.