Defending Against the Trust Fund Penalty as a Responsible Officer

A trust fund penalty can be imposed on a person deemed to be a “responsible officer” of a corporation and limited liability companies, essentially piercing the corporate veil of limited liability.

Trust fund taxes consist of the portion of taxes withheld from the employees by the employer.  This includes federal income tax and one-half of the Federal Income Contributions Act (FICA), which consists of social security and medicare tax.  If a trust fund penalty is assessed, only interest accrues on the penalty and not additional penalties.

Often, the IRS may assert the penalty against anyone who they believe may be liable.  In order for the IRS to impose the penalty, they must establish two elements:

1) that the individual was a responsible officer, and

2) that the individual acted willfully in failing to collect and pay trust fund taxes to the IRS.

This blog posts address the responsible officer element of the trust fund penalty.

Responsible Officer

To be a responsible officer, you can be an employee, corporate director, corporate officer, partner, shareholder or even surety lender.  The IRS looks at whether the person has control and responsibility over the finances.  Some specific facts the IRS will look at include 1) check signing authority, 2) control over financial affairs 3) duties/responsibilities in the by-laws, 4) ability to hire/fire employees, 5) ability to direct payments to creditors, 6) say on which bills are paid, 7)responsibility for making federal tax deposits, 8) controls payroll disbursements, etc.

Defense Options

To prove that you were not a responsible officer in the eyes of the IRS, you may be able to defend yourself by:

1) Proving that you did not have status, duty or authority – essentially showing that you did not have the power to pay the taxes

2) Proving that you cannot exercise independent decision making authority about who gets paid and the priority of these payments – see I.R.M.  5.7.3.3.1.2

3) Proving that you were not a responsible officer during the time the taxes were withheld – you may be able to limit your exposure to the quarters the taxes were not paid if you were not in control of the finances at this time and deemed to be a responsible officer even though you may be one presently

 

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