Unpaid trust fund money of a S-Corp

[WhiteOleander]

I would like some general info and perhaps real life experiences with unpaid trust fund money. I do not have all the details yet but someone may have run into this issue.

Owner of a S-Corp passed away several weeks ago. He was the sole s/h in the s-corp. He and his wife lived in Georgia and that is the state the corp was formed in. He became ill with lukemia and they lost everything paying medical bills. They lost their house and all.

It looked like the lukemia was in recession. He and his wife moved here to TX. (her mother is here) In less than six months the lukemia returned and he passed away.

The s-corp owes approx 20,000 in unpaid trust fund money. Since the corp was formed in GA and that is not a communty property state, can the IRS hold the wife responsible for the debt? There are no assets in the corp or personally. I'm just wondering if they can hold her responsible?

Thanks

[JohnH]

I think the first thing IRS will try and determine is whether she had any control over the finances of the corp. Could she sign checks, was she an officer of the corp, and did she know about the diversion of trust fund money? If she had check-signing authority they will try to hold her responsible even if she didn't actually sign any checks. Also, IRS will go after any responsible party - was there anyone else who could sign check on the corporate accounts?

Is the $20K all trust fund taxes, or does it include some matching payroll taxes, penalties, and interest?

[WhiteOleander]

Thanks for the response John. I do not know the particulars of the debt yet. I also don't know if she had any authority over the corp money or not.
If she had no authority of any kind in the corp, I am wondering if the debt is uncollectible since GA is not a community property state.

[JohnH]

It has been a long time since I was involved in a situation involving unpaid trust fund withholding, so I'm hoping someone with more recent experience will jump in if we keep this thread going. Maybe they will fill in the gaps on the foll;owing, or correct any errors.

I believe the process begins with the IRS doing a thorough investigation to determine all responsible parties. They will obtain bank signature cards, copies of checks, corporate minutes, loan applications, and any other info which might help them to tag as many people as possible as potentially responsible for the failure to pay in the withholding taxes. (Even if someone can't sign checks, IRS will often try to tag them if it can be shown that they had decision-making authority and knowledge about the failure to pay but did nothing about it.) If IRS determines that the corporation has no assets or ability to pay, they quickly turn it into a Trust Fund Recovery case, whereby they abandon the effort to collect everything but the Trust Fund amounts. Their procedure is to assess a penalty equal to the Trust Fund withholding, and they try to make every responsible party equally liable.

One thing to keep in mind is that if the corporation has any available cash and it appears to be headed down this path, it's wise to have the corporation make payments and specifically apply them to the Trust Fund withholding. There's a very precise procedure to follow in order to make it stick, but the end result is that the Trust Fund Penalty will be lower. The down side to specifying payments to Trust Fund Withholding is that it puts IRS on notice that there's a problem and will probably cause them to accelerate their collection efforts. But in most cases, if the business is in trouble, that fact is already known to IRS anyhow.

Much of this may not apply with your client, and it may be that you can establish that the wife isn't a responsible party. I can't help but wonder if the husband's illness is a factor there, because if the business continued operation during his extended illness, somebody else must have been signing checks. Even if it was not the wife, a trusted employee or family member may have some Trust Fund Penalty exposure.

Another question is whether the $20K really is the entire extent of the problem. People often skip filing 941's when they realize they're in trouble, because they get overwhelmed or that delays the eventual day of reckoning. Obviously you'll know more when you meet with them, but I'm betting the problem is likely much larger than the $20K.

[WhiteOleander]

Thank you very much. I was looking for that sort of "scenarios" of what the IRS usually does.

Hopefully, I can get more info later.

[DaveO]

I have worked a few trust fund recovery cases. The ideal situation here as I understand it is for the husband to be the sole responsible party. The trust fund penalty would then be assessed on him alone and although it would be a claim on his estate it doesn’t sound like there is anything there anyway.

The IRS will assess everyone but will harvest the low hanging fruit. One case involved an office manager who perpetrated a massive embezzlement over a period of years against a “C” corporation owned by two shareholder employees. She diverted money for her own use that should have paid the taxes and the operating expenses of the company. When the whole thing blew up there was about $350K of unpaid liabilities on top of the taxes forcing them into bankruptcy. While the office manager was responsible in the legal sense the IRS didn’t pursue her instead opting to go after the two shareholders. We made an arrangement with the bankruptcy court for them to pay the trust fund portion out of their pockets with the balance discharged. Even so, the IRS still took another run at them and we when told them that only the trust fund taxes were assessable against the shareholders personally they laughed at us. We had to educate even the local IRS bankruptcy specialist. In the end it worked out but is was a fight.

[WhiteOleander]

Thanks much DaveO

[JohnH]

I sent you a PM about this as well.