Yes. Although it’s the business entity that accrued and is liable for payroll taxes, interest, and tax penalties, the government can hold an individual personally liable for back payroll taxes by assessing the Trust Fund Recovery Penalty.
Employers are statutorily required to deduct and withhold an employee’s federal income, Social Security, and Medicare taxes. See IRC 3102(a) and 3402(a). Additionally, employers are required to match the employee’s share of social security and Medicare taxes. The withheld income tax and the employee’s share of social security taxes are referred to as the trust fund taxes. The employer’s share of social security taxes and Medicare taxes are excluded from the trust fund tax definition.
Under IRC 6672, a person who is ”responsible” for collecting, accounting for, or paying over any tax and “willfully” fails to do so or attempts to evade or defeat any such tax or the payment thereof is liable for 100% of the tax evaded, not collected, or not accounted for and paid over. See IRC 6672. IRC 6672 is known as the trust fund recovery penalty (TFRP). Taxes withheld by an employer are held in trust for the exclusive benefit of the United States. The TFRP is an IRS tool utilized to pursue the collection of the unpaid trust fund portion of a payroll tax against third parties. Every dollar collected from third parties is applied toward the amount the business owes in uncollected trust fund taxes.
In order to be liable for the TFRP penalty, the statue requires that a person must be both “responsible” and “willful.” An individual is considered “responsible” if “he retains sufficient control of corporate finances that he can allocate corporate funds to pay the corporation’s other debts in preference to the corporation’s withholding tax obligations.” Courts have utilized several factors in making a responsible party determination including whether the individual:
- Is an officer or member of the board of directors;
- Owns shares or possesses an entrepreneurial stake in the company;
- Is active in the management of day-to-day affairs of the company;
- Has the ability to hire and fire employees;
- Makes decisions regarding which, when and in what order outstanding debts or taxes will be paid;
- Exercises control over daily bank accounts and disbursement records; and
- Has check-signing authority.
An individual is “willful” if he/she knew of the unpaid taxes or recklessly disregarded his/her duty to have knowledge of the tax payments.
An IRS Revenue Officer will conduct an interview (known amongst tax practitioners as the 4180 interview because of the IRS form utilized in conducting the interview) with suspected responsible and willful parties. The IRS has three years from April 15 of the year following accrual or the date the Form 941 was actually filed, whichever is later to assess the TFRP. The IRS does not have to assess a TFRP against the owner of a sole proprietorship, the general partner of a regular partnership, or a Qualified Intermediary.
The determination of whether a party is responsible and willful is made on a quarter by quarter basis. Once the IRS makes a responsible party assessment, the burden shifts to the taxpayer to prove the assessment is incorrect.
IRS 6672 is identical to IRC 7202 which criminalizes the failure of a “responsible person” who “willfully” fails to pay over payroll taxes to the IRS. A taxpayer violation under IRC 7202 is punishable up to 5 years in prison and a fine of no more than $10,000. Recently, there has been a trend for the IRS to refer payroll tax cases to its Criminal Investigation Unit.
If the IRS is threatening to assess the Trust Fund Recovery Penalty against you, has requested or summonsed you to conduct an interview (4180 interview), or you wish to appeal the trust fund recovery penalty, then contact the Law Offices of Todd S. Unger, Esq. LLC right away. We may be able to help you avoid a trust fund assessment or implementing a plan to resolve back payroll tax debt. Call today (877) 544-4743.