Tax & Business Insights

Trust Fund Disclosure - Part II

Volume 16 Issue 4 -- July/ August 2004

This issue is part of a two-part discussion. For a longer version of this two-part discussion, CLICK HERE.

In the last issue, we considered basic aspects of the Trust Fund Penalty and IRS practices in investigating and imposing the penalty, using, as an example, MBrok, Inc., and its president, Mr. Top (“Top”) and other key officers, Mr. Notme (“Notme”) and Ms. Evasif (“Evasif”). This time, we’ll look more carefully at the critical role of the Form 4180 Disclosure Statement and other options for handling Trust Fund cases.

As an illustration, one of the questions on Form 4180 is, “During the time the delinquent taxes were increasing, or at any time thereafter, were any financial obligations of the corporation paid? If the answer is “yes,” and Notme knows who was paid, then the IRS might argue that Notme knew what was going on and thus is a responsible party. The IRS will assume that Notme knew that delinquent taxes were increasing but paid other creditors, or that Notme participated in the decision to pay other creditors.

Preferring Other Creditors Over the Government

The gravamen of the Trust Fund Penalty is that a creditor other than the U.S. was preferred over (or paid before) the U.S.

Let’s say that Notme is really only peripherally involved in the payment process and did not have the authority to make the decisions necessary to make him a responsible party. If Notme has a legal representative at the meeting with the Revenue Officer and has had a chance to review the Disclosure Statement before the questions begin, then Notme might have a chance of avoiding the Trust Fund Penalty. In such situations, the right to Counsel and advice concerning how to respond to the questions on the Disclosure Form can be invaluable.

It is quite unusual for an individual to have representation at the information-gathering stage but representation at that time can be crucial. The Disclosure Statement is designed to trap anyone peripherally involved with a corporation like MBrok, Inc. into admitting facts that could give the IRS grounds for treating him or her as a responsible party.

The reality is that the IRS will often pursue nearly anyone who had any possible authority to make the decision about which creditors get paid, thus potentially causing the IRS not to be paid.

If Notme is a proposed target of a Trust Fund Penalty, he will receive an IRS Form 2751, notifying Notme that the penalty is being considered. He will have 60 days to appeal in writing the proposed Penalty to an IRS Appeals Officer, during which time no interest is imposed against Notme.

If you are representing a taxpayer in this situation, you should ask for a copy of any Disclosure Statement, Form 4180. Many times, a practitioner will spend time working hard to get a person absolved from the Trust Fund penalty only to find out later that there are damaging statements on a Form 4180 which make avoiding the Trust Fund Penalty more difficult or impossible.

The attitude of most IRS Appeals Officers is if someone had “colorable authority,” then they were responsible for the Trust Fund Penalty. This is an extremely difficult area of the law. Also, it is often hard to get the parties against whom the Trust Fund Penalty has been assessed to agree to some sort of proportionate payment of the Trust Fund Penalty.

There are quite a few court decisions supporting the principle that the Trust Fund Penalty should not automatically be imposed against the top officers of a corporation based on the mere fact that an individual is an officer. In many instances where the president is titular and does not participate in financial decisions, it is possible for such a president, like Top, not to be held responsible for the Trust Fund Penalty. Again, the statements made to the Revenue Officer on the Disclosure Statement can be quite important.

Other Forms of Relief

If the Trust Fund Penalty has been asserted against your client and you have not had success in appealing the assessment, there are still courses of action that can be considered by the taxpayer. Without getting into an elaborate definition of these alternatives, these include:

(1) Paying the Trust Fund Penalty for one employee for one quarter and then filing a Claim For Refund. If, after six months, the Claim is not granted, then there is jurisdiction to file a refund suit in the Federal District Court. At that point, the person’s status as a “responsible party” can be litigated.

(2) Submitting an Offer in Compromise based on doubt as to collectibility.

(3) Requesting an Installment Payment Agreement. An Installment Payment Agreement does not reduce the total amount due or the interest, but allows the person against whom the penalty has been imposed to pay the same over a period of time in installments.

If you have questions about these types of matters, call The Tax and Business Professionals.

This issue part of a two-part discussion. For a longer version of this two-part discussion, CLICK HERE.

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Tax & Business Insights is expressly prohibited without the written permission of Tax and Business Professionals, Inc.

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