A Trust Fund Recovery Penalty assessment is a tool the IRS uses to enforce the collection of unpaid payroll taxes. These taxes include federal income taxes and employee contributions to FICA (Social Security and Medicare). The trust fund penalty is not levied against the company but against individuals responsible for withholding and paying these taxes who willfully fail to do so.
An organization can have more than one responsible person, including officers, directors, and even employees with authority over financial decisions. The key determinant is who has the power to direct the payment of bills and payroll taxes. This responsibility is not determined by title alone but by actual roles and actions within the company.
When facing a trust fund penalty assessment for unpaid payroll taxes, taxpayers can challenge it using various methods. The chosen approach will differ based on where the taxpayer is in the process.
- If a taxpayer receives Letter 1153 proposing a trust fund penalty assessment, the best way to challenge the assessment is to file a protest within the 60-day allowable period and get the case to Appeals.
- If a taxpayer misses the 60-day window to file an administrative protest and has not paid the taxes, they can still challenge the assessment by filing a Doubt as-to-Liability Offer in Compromise (DATL).
- If the taxpayer fails to challenge the proposed assessment within 60 days and has made payments, they can file a refund claim to request a review of the assessment.
Protesting a Trust Fund Recovery Penalty Assessment
If it has been less than sixty days since the date on Letter 1153 that proposed the trust fund assessment, it is advisable to file a protest with the IRS. Letter 1153 provides a detailed description of the necessary elements to be included in the protest.
The protest should contain the following information:
- Your name, address, and social security number.
- A statement that you want a conference.
- A copy of the Letter 1153, or the date and number of the letter.
- The tax periods involved (shown on Form 2751)
- A list of the findings you disagree with.
- A statement of fact, signed under penalties of perjury, that explains why you disagree and why you believe you shouldn’t be charged with the penalty. Include specific dates, names, amounts, and locations that support your position. Usually, penalty cases like this one involve issues of responsibility and willfulness. Willfulness means an action was intentional, deliberate, or voluntary, not an accident or mistake. Therefore, your statement should clearly explain your duties and responsibilities and, specifically, your duty and authority to collect, account for, and pay the trust fund taxes. Should you disagree with how the IRS calculated the penalty, your statement should identify the dates and amounts of payments you believe they didn’t consider and/or any computation errors you believe were made.
The protest must be signed under penalties of perjury by including the following: “Under penalties of perjury, I declare that I have examined the facts stated in this protest, including any accompanying documents, and to the best of my knowledge and belief, they are true, correct, and complete.”
Gathering sufficient evidence demonstrating you were not responsible is key to a successful protest.
Doubt as to Liability Offer in Compromise
The IRS may compromise a tax liability if there is doubt as to liability. A DATL is an Offer-in-Compromise that does not depend on the taxpayer’s ability to pay. Instead, it is based on the taxpayer’s ability to prove that they do not owe the taxes in question.
The most important part of your offer is the evidence you provide, which must be submitted with Form 656-L. This evidence should include all relevant information and documentation supporting your argument that you were not an individual responsible for withholding or paying the taxes and/or did not willfully fail to withhold or pay the taxes. If you can prove to the IRS that they incorrectly assessed the Trust Fund Penalty, they may withdraw the assessment against you. If your DATL is denied, you have the right to appeal the denial.
Please note that you must offer at least $1, even if you believe you owe nothing and can prove it.
Claim/Suit for Refund
Another method to challenge the liability is to submit a Claim for Refund using Form 843, Claim for Refund and Request for Abatement. A taxpayer does not have to pay the entire trust fund penalty assessment before filing the refund claim. Instead, the taxpayer need only pay the trust fund taxes for one employee for each quarter they wish to challenge. The claim for refund must be submitted within two years of payment.
If a taxpayer submits a claim for a refund and the IRS denies the claim or fails to respond within six months, the taxpayer can file a lawsuit to seek a refund in either the United States District Court or the United States Federal Court of Claims.
If the IRS issues a formal claim disallowance, taxpayers can appeal to the IRS Independent Office of Appeals before bringing a court suit.
Get Help with Your Trust Fund Penalty Assessment
If you have received a proposed trust fund recovery penalty assessment or have already been assessed, seeking professional tax representation is important to minimize your liability. Contact East Coast Tax Consulting Group today at 561-826-9303 for expert tax help.