Businesses sometimes fall behind on payroll tax deposits. The IRS assesses tax penalties on the business like the Failure to Deposit Penalty and the Failure to File Penalty. But are you personally responsible for the tax debt of the business? There is a special penalty that can make this debt your personal responsibility.
I am a tax attorney in Minneapolis, Minnesota. I represent taxpayers before the IRS and state tax authorities. I handle tax debt, audit defense, payroll tax issues, and criminal tax matters. The IRS is authorized to assess a penalty against some individuals when payroll taxes are not paid. This penalty is called the Trust Fund Recovery Penalty. (TFRT) It is also a 100% penalty.
Internal Revenue Code § 6672 authorizes the assessment of this penalty. This penalty used to be a rare thing. Now it is MANDATORY. The IRS will assess the penalty against individuals when the business falls behind. The business can just close its doors, but the individual will still be there to collect from.
IRC § 6672 allows the assessment of this penalty agains:
“any person required to collect, truthfully account for and pay over any tax imposed” and “who willfully fails to collect such tax or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof”
Every business has at least one person that qualifies under this section. Many businesses has two, three, or even more people associated with it that are covered. The IRS many times will assess this penalty against them all. This penalty is also not dischargeable in bankruptcy. The IRS is very aggressive in collecting this penalty.
This is because it covers money that the business holds for the government. Income tax withholding, FICA and medicare money that the business keeps back from the employee's paychecks don't belong to the business. This money belongs to the government and the business is just holding it in trust. So, the government views this as theft. In the IRS's view, the business stole from the government and someone needs to be held responsible.
If you are assessed this penalty, you have 60 days to protest and appeal. It is very important that you don't miss the 60 day deadline. You'll have to submit evidence to the IRS that you are not responsible for the tax or liens could be placed on your property and levies could begin.
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