My client and Mr. X purchased an automobile repair shop, which they owned 50/50.
Initially, Mr. X ran the business. My client was the signatory on the company checking account, but signed few checks and was generally not kept apprised of business matters.
Suddenly, Mr. X disappeared. A few weeks later, he was arrested in another state and charged by indictment in the United States District Court with Conspiracy to Distribute Fifty Grams or More of Methamphetamine. The indictment alleged that the conspiracy commenced while he was running the auto repair shop. My client had no knowledge of these nefarious criminal activities and was not even aware Mr. X had been arrested. Mr. X was convicted and went to prison.
Upon Mr. X’s disappearance from the business, my client attempted to recover what control she could and sell the business, which she did at a great loss. Then, the nightmare really started.
The Internal Revenue Service notified my client that Mr. X had failed to collect and pay many thousands of dollars in employment taxes. Because my client was an owner, and her name was on the checking account and other documents, the IRS imposed the Trust Fund Recovery Penalty (TFRP) on my client personally.
The TFRP may be assessed against any person who:
- Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
- Willfully fails to collect or pay them.
A responsible person is a person or group of people who have the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:
- An officer or an employee of a corporation,
- A member or employee of a partnership,
- A corporate director or shareholder,
- A member of a board of trustees of a nonprofit organization,
- Another person with authority and control over funds to direct their disbursement,
- Another corporation or third party payer,
- Payroll Service Providers (PSP) or responsible parties within a PSP
- Professional Employer Organizations (PEO) or responsible parties within a PEO, or
- Responsible parties within the common law employer ( a client of PSP/PEO).
For willfulness to exist, the responsible person:
- Must have been, or should have been, aware of the outstanding taxes and
- Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).
Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.
My client came to me. She was at retirement age, and this IRS action would wipe her out financially after a lifetime of work. The biggest problem was that she had the authority to pay taxes and her name was on the bank account and has signed some checks. We appealed the imposition of the penalty and set out the long story of deception and criminal conduct, and that my client was not actively engaged in the business and had bouts of illness. We argued that Mr. X was a criminal, and apparently using the business as a cover for drug trafficking. My client was the perfect partner for such a situation: sick and limited in her ability to uncover her partner’s criminal actions. We argued that all these facts lead to the conclusion that my client’s failure to pay the employment taxes could not be considered willful as she was the victim of criminal conduct.
A few weeks later, the IRS withdrew the penalties. There is no substitute, even in tax law, for telling the story of the human condition when the issue involves a person’s circumstances and difficulties. That is what got my client a great result.
Call Jeffrey R. Siegel, your Kansas City Tax Attorney, for help with IRS collection actions. We can help you make sense of tax law and the Trust Fund Recovery Penalty, in particular.