Trust Fund Recovery Penalty

[erchess]

Owner of several convenience stores was inattentive to business for a year and a half due to severe health problems. During this time his accountant and two store managers stole the payroll taxes that they reported to him had been paid. Now he's being hit with trust fund recovery penalty and I just realized from TTB that this is instead of collecting from his business rather than a penalty in the usual sense of the word. (The letter he got made it seem to me that they wanted additional monies.)

If his business goes on and pays the taxes the "penalty" on him as an individual will go away right? So how do we handle this? I anticipate his getting the taxes paid within the sixty day period for response to the letter.

[JohnH]

If the business is still in operation, the trust fund recovery penalty can probably be avoided. However, if the business is closing or closed, the the IRS will take steps to assess the penalty against any responsible parties whom they identify as being able to pay. If the client is actually in danger of having the penalty assessed, and if the business can make any payments against the liability, it's extremely important to designate the payments properly to mitigate the trust fund recovery penalty.

[OtisMozzetti]

I would imagine that the IRS is supposed to be trying to collect the Trust Fund Recovery Penalty not only from the business owner, but also from the other responsible parties consisting of the accountant and the two store managers who allegedly stole the monies. If the IRS collects from the business owner, then the owner should be able to obtain a court judgement against the accountant and the two store managers, assuming that they stole the monies. We also don't know whether he will be able to collect from those three.

[JohnH]

IRS will go after all responsible parties, but they will take the path of least resistance and collect from whomever they can get it from first. If the business owner has the ability to pay and the other responsible parties don't, then IRS will be content to get it all from him and then just forget about it. They will leave it to him to attempt to recover from the other parties if he thinks he can get anything out of them.

It's critically important for the business to properly designate any payments at the time the payments are made, specifying that the payments are to be applied first to trust fund taxes and then to employer matching taxes, penalties, and interest in a certain order. If that crucial step isn't taken, the IRS will use an allocation method that is much less favorable to the taxpayer and he will be stuck with the maximum Trust Fund Penalty. There is very important wording which must accompany the payments - get it wrong and the whole strategy goes out the window. (and maybe you get the blame). I had a client in this situation about a year and a half ago - I insisted that he hire a lawyer to handle the trust fund designation correspondence. Everything worked out just fine and he got current & in good standing, but I wasn't interested in being his punching bag if something went wrong.

[erchess]

TY John

Just to clarify, the thieves spent their ill gotten gains on cruises and other vacations rather than on assets which could be seized and sold. They are now apparently more or less insolvent and although prosecution is proceeding it will be years before there is any hope of recovery from them.

John can you provide the verbiage needed to make sure the payments are applied to the client's best advantage? I need to instruct them on this but the new accountant takes care of the actual tax filings.

[JohnH]

Check your email.

Also, you might want to go to this previous thread:

http://www.thetaxbook.com/forums/showthread.php?p=64798#poststop

[taxea]

The IRS will go after the party/parties responsible for the payments. I don't think they will go after the thieves unless they are named as responsible parties on the company documents.
After all, would they go after the burglar if the money was taken from the business before it could be deposited?????

The business owner should report the theft to the police and have the responsibles arrested and prosecuted. The procecuting attorney can request restitution as part of the sentencing. The business owner can claim the theft as a loss if he can show attempts to recover the money. If/when the money is recovered it then is reported as income.

[erchess]

Yes

The IRS won't go after anyone who they don't know about. I don't think they know about the employees but I could be wrong.

Taxpayer has filed police report but matters are proceeding slowly. The miscreants have few to no assets and they have documented where the money went - mostly cruises and other luxury vacations.

I appreciate all the input. Keep it coming.

[DaveO]

Even if the business is paying the taxes it doesn't hurt to show it as payment on the trust fund. I've got a couple of these cases going now. The collection officer told me that when they are collecting from the business in the normal manner they will apply the funds first to penalty, then interest, then tax, then trust fund. Once the trust fund penalty is asserted the order is reversed so the trust fund is paid first. As soon as that is paid they will release any liens they may have on his personal property.

[JohnH]

The IRS won't go after anyone who they don't know about. I don't think they know about the employees but I could be wrong.

Taxpayer has filed police report but matters are proceeding slowly. The miscreants have few to no assets and they have documented where the money went - mostly cruises and other luxury vacations.

I appreciate all the input. Keep it coming.

The IRS should know about the other employees if they did a full investigation. One of the first things they do is secure signature cards from the bank, and they will hold anyone accountable who had authority to write checks. The assumtion is that anyone who had discretionary control over the funds of the business is equally responsible for the diversion. But the problem is, they will go after whomever they can get the money from first, regardless of how much or how little they contributed to the problem.

[DaveO]

The IRS should know about the other employees if they did a full investigation. One of the first things they do is secure signature cards from the bank, and they will hold anyone accountable who had authority to write checks. The assumtion is that anyone who had dicretionary control over the funds of the business is equally responsible for the diversion. But the problem is, they will go after whomever they can get the money from first, regardless of how much or how little they contributed to the problem.

That would certainly seem to be true. However one of the cases I'm working on is for a 2 shareholder "S" Corp.The IRS has seized the personal refunds of one shareholder for 3 years without ever touching the other one.

[JohnH]

I believe if I were the one being tagged, I'd point out the other source of revenue to IRS

That is interesting, because with every one I've ever seen (not many, thank goodness) the first thing they asked for was a list of parties having any control over the company's funds with addresses and SS#'s, along with copies of bank signature cards. Of course your case shows that the follow-through may not be as thorough as the initial investigation...

[erchess]

New Wrinkle

The business (before I came on board and presumably on the advice of the CPA who does their returns) issued 1099M's to the former employees in question. Was this appropriate and since the 1099Ms were probably reported to the IRS as a tax deduction would this have any bearing on my clients? It seems like maybe they have all the tax benefits from the theft that they are entitled to but I don't know.

[BOB W]

Just a quick note>>>Trust Fund Monies should be paid with a PERSONAL Check and marked as such.

[JohnH]

The business (before I came on board and presumably on the advice of the CPA who does their returns) issued 1099M's to the former employees in question. Was this appropriate and since the 1099Ms were probably reported to the IRS as a tax deduction would this have any bearing on my clients? It seems like maybe they have all the tax benefits from the theft that they are entitled to but I don't know.

It might have some bearing on the tax treatment of any amounts the client ultimately pays, but I think it has no bearing on the legal niceties of how the client should handle any payments made against the tax liablity by the corp. Remember, the first goal is to try and minimize trust fund recovery assessments against the client if legally possible.