Trust Fund Recovery Penalty

[JoshinNC]

OK, I need answers from someone who has been through this before with a client.

Taxpayer was the president of S-Corp that was dissolved in bankruptcy court in 2002. Prior to dissolution S-Corp generated payroll tax liabilities over last 4 quarters of about $180,000. S-Corp did not pay the liabilities and IRS is now pinning civil penalties pursuant to Section 6672 on my client. S-Corp had a controller whose responsibilities included preparing payroll reports and submitting payroll deposits. However, controller was not a signatory on payroll account and did not sign payroll returns (my client did in capacity as President).

Question 1: Were liabilities able to be gotten rid of during bankruptcy?

Question 2: Can the controller not be held liable under Section 6672 as a "responsible person" without having signatory authority? TTB pg. 23-7 gives an example where outside CPA was gone after, but he had signatory on account. He got off in that he was not involved in the day-to-day management of the company. In this case the controller did assist in day-to-day management, prepared every payroll return and always submitted the funds. I think he may be a "responsible person", and even more responsible than my client. My client contends that he had no knowledge that the taxes weren't being paid, as he signed the return and assumed they would be paid.

Thanks in advance!

[JON]

Who Cares

The penalty goes against your client not the corporation. Who cares if the the controller had any responsiblity the IRS can and will collect the penalty from as many as they think responsible. If they get more than one it is a plus. If not a "sig" I doubt if controller would be liable, but still could be. Makes no difference. If you client wants to sue controller he always could and the IRS does not care in fact enjoys listenning to your client's reasons for not paying. At this point your client could declare bankruptcy himself and not get rid to the IRS trust fund levy. I saw one where they collected from the one of the owners and a couple of years later he was sueing minority owners for what he thought they should have paid. Just lost some more money to attorneys.

IRS always collects from the most likely to pay first, but even if they are going after others it does not reduce the amount they are going after. That is why it is a penalty.

[jainen]

he will lose

Payroll taxes can't be discharged in bankruptcy because they are not a liability of the company. They were holding the funds in trust for the employees who had paid them. If your client wants to fight this you'd better get paid up front, because he has no qualms about spending other people's money and blaming the victims. Also be sure to have him sign a good engagement letter, because in the end he will lose.

[JoshinNC]

already done

engagment letter is signed and retainer is paid!

I'll go with him to the meetings/assist in filling out forms, but in the end I think it's going to be a problem.

[geekgirldany]

I have a client in a similar position. Still in business though. Kept employees and did not pay the payroll taxes for one year... this also was in 2002. Client get notices every year but so far they have not come after him for it. I don't know why. He has been paying the payroll taxes on time ever since.

Now when this happened with him I did some research. I do his bookkeeping and do the payroll forms/deposits. I would give him the deposit slip for a check to be written and he signed the forms. To my understanding when not if they come after him he will be responsible. If I had been a signor for the account then I could have been responsible. Also if I had signed the forms I could have been responsible.

I dont' think he will be able to go after the controller. I read a court case where the taxpayer tried to pen this on the bookkeeper. She was not held liable because she did not sign checks of any kind or sign the forms.

[JON]

Go after the controller

If your still in business you should be working out a payment program for the old, why wouldn't you??? IRS goes after the responsible parties they do not care how many there are they have succeeded in collecting the total from more than one before. They do not split it up. Signing checks or payroll forms is probably the most important factor, but there are others including accepting payment for your services instead of paying old withholdings you are aware of. It usually takes more than that, but go look at the case law. Owners active in the business signing checks have NO outs. If they want sue their employees the IRS does not care.

[JoshinNC]

Statute

Does the 10 year collection statute apply to cases of this nature? The penalty assessment was made in April 2005, so does that mean that collection activities (i.e. levies, leins, garnishments) could only continue until April 2010, assuming that no mutual agreement exists to extend the statute? or is this penalty not subject to the 10 year statute?

Would Section 7202, which allows for imprisonment in the event of failure to collect or pay over a tax come into play in this case?

Any assistance would be greatly appreciated.

[jainen]

Lighten up, man

Lighten up, man. Seven in the morning (in California), I turn on the screen and we're talking prison? Ouch.

It's pretty hard for the IRS to prove criminal intent, but it happens. Why, just in 2005 they got convictions against 155 tax preparers, and lots of other deadbeats too. You really need legal counsel if you have an issue of that nature.

Personally I don't have much sympathy about this. It's one thing if you can't afford to pay your taxes. But when you HAVE the money that you withheld from your employees, and use it for something else, that's a kind of theft, don't you think?

[JoshinNC]

agreed

The problem is they had a full time controller who they were paying good money ($80 k) who prepared the returns but had the president sign them. The president, my client, did not know the taxes weren't being paid until well after dissolution of the business. So, while I also believe it is theft, I don't believe my client is guilty of that theft. Problem is, the controller was smart enough to not sign anything and is a family friend, so they don't want to strain that relationship.

Really is a "sad" situation!

[jainen]

Poor Richard's Almanac

"A fool and his money are soon parted."