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.
The gravamen of the
Trust Fund Penalty is that a creditor other than the
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
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
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.
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:
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.
Submitting an Offer in Compromise based on doubt as to
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.
By Tax and Business Professionals, Inc.
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Manassas, VA 20110
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