If you have a business that is run as a Corporation or a Limited Liability Company, you know that the business is supposed to pay employment taxes every month.
Does the fact that you are doing business under the protection of a Corporation or LLC protect you personally from paying the employment taxes?
The short answer is NO. This is true even if your company has failed and gone out of business.
If the IRS finds you to be a person that is responsible under the law for withholding, accounting for and paying taxes taken from your employees' paychecks, then they are coming after you personally if you didn't turn that money over to them.
How can that be? You started the business as a Corporation or an LLC just so you could be protected from paying the debts of the business.
So what? The law doesn't necessarily protect you from personally paying the Trust Fund portion of the employment tax.
What is the Trust Fund portion of the employment taxes? Quite simply it is that portion of the Federal taxes that your company is supposed to withhold from your employees' paychecks every pay period. The money that you keep back from the employees you are supposed to be holding in trust for the IRS. You are supposed to pay the money to the IRS every month.
But, many businesses that have cash flow trouble never pay the money to the IRS. They use it to keep the lights on and the doors open so that they can live another day to try and increase their cash flow. If the business keeps getting deeper and deeper in debt, then many times, it just has to close its doors.
When a Corporation or an LLC goes out of business while owing the IRS employment taxes, the IRS cannot collect that portion of the taxes that the company is supposed to contribute on behalf of the employees every month. Those taxes are gone forever.
But, if the IRS can hold you or anyone else in your business personally responsible for paying trust fund taxes to them they will go after you. This is called the Trust Fund Recovery Penalty (TFRP). The assessment of the 100% Trust Fund Penalty transforms a corporate debt into a personal debt.
So, when can the IRS hold you or others in your business personally responsible for paying the TFRP?
There are two tests that must be met. The IRS must find that you or others:
1. are “responsible” for the TFRP. A “responsible person” is one that has the right to exercise the ultimate control over a company's income and assets. Also, this person would have made the decision to pay other company creditors instead of paying the employment taxes that were due, and;
2. you acted “willfully”. This means that you made a knowing and conscious decision to pay other company creditors while knowing that the trust fund taxes were due and owing.
The IRS makes these determinations by interviewing you and filling out a form that contains questions about your duties and the duties of others in your business.
The TFRP issues presented here are simplified. TFRP issues can actually be quite complicated. There is a long history of court opinions that discuss the things that the IRS needs to prove to make someone personally responsible. The Revenue Officers charged with making the initial decisions about this don't normally care about the details of the case law. They don't usually even know about the case law. The majority of the time they just hold whomever they can “responsible” for the TFRP. If you are held responsible and don't agree with the determination, then you must appeal the Revenue Officer's decision to the Appellate Division of the IRS.
This is not a “Do It Yourself” situation folks. Most people have no idea what to do when it comes to challenging a TFRP assessment. One wrong move here can put you into debt for many years to come. Never talk to a Revenue Officer by yourself when an inquiry is being made about responsibility for the TFRP. Always obtain experienced representation when this issue raises its ugly head.