An effective Trust Fund defense anticipates IRS enforcement action before it begins. It is vital to have a clear understanding of what action the IRS will take, before they take it. One strategy we use frequently is immediately getting the case out of the hands of a Revenue Officer by appealing to more agreeable IRS department.
Here are four key tips if you are concerned about trust fund or pay roll tax:
First, when it comes to trust fund tax, it’s “shoot first, and ask questions later.” The IRS is going to gather information to determine personal liability of the Trust Fund Recovery Penalty by using Form 4180, Report of Interview with Individual Relative to the Trust Fund Recovery Penalty. Take caution because this form is used to cast a wide net and hold as many individuals as possible personally responsible for the penalty. The IRS will quickly prosecute trust fund assessments even from individuals who should not be held liable.
Second, make sure the IRS applies the payments toward the trust fund liability first. The IRS will collect the tax from the business entity, but apply the payment to the non-trust fund taxes because the IRS can later hold individuals personally liable for the trust fund portion. Remember that the non-trust fund taxes are compromised of the employer’s matching social security (FICA), unemployment compensation (FUTA) and Medicare fund. These matching contributions come from the employer’s resources, rather than deducted from employee paychecks. You have a right to designate how the payments are applied.
Third, do not allow your emotions and wishful thinking to cloud your good judgment and dig yourself into a deeper financial hole. The IRS may attempt to shut down the business and force the sale of assets and receivables. You can resist this, but the IRS will not allow a business to continue without paying all current taxes on time and having a plan in place - backed by real numbers – to pay the delinquent liabilities.
Fourth, make sure you know about all solutions to eliminate the penalties as well as the unpaid tax liability. For example, the IRS has discretion to not hold you personally responsible if you can demonstrate that payment of the trust fund recovery penalty will create hardship for you and your family. See Internal Revenue Manual § 18.104.22.168(2) and § 22.214.171.124.1 for further explanation of trust fund defenses.
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