If the business you own, co-own, or manage through a partnership or corporate structure fails to pay its income and employment taxes to the IRS, you may think you will be protected from personal liability through the business structure you’ve established.
While some business entities do indeed shield their founders or owners from liability on many fronts, the IRS is a different breed of collector, with powers a bank, creditor, or supplier can only dream of having.
When it comes to employment and income taxes withheld from employee payrolls, the IRS relies on a law that provides it with what’s called the Trust Fund Recovery Penalty (TFRP) to use against a “responsible person” within the organization to collect those taxes.
It’s not uncommon for struggling businesses to withhold paying or underpay income taxes, employment taxes, payroll taxes, and state sales taxes to use the funds to survive. The debts to the IRS and Florida Department of Revenue (DOR) remain active, however, and those agencies will come after you for payment — plus penalties.
If you’re facing what the IRS calls trust fund liabilities for withholding but not remitting these taxes, contact me at Zuckerman Law, LLC. I have been helping others like you in hot tax water for more than 30 years. I will evaluate your situation and advise you of the best options going forward to seek tax relief and resolve your problems.
My firm proudly serves clients in Fort Lauderdale and the rest of Broward County, as well as the surrounding areas throughout South Florida, including the counties of Palm Beach, Miami-Dade, and Collier.
Business Entities and Overall Liability
Depending on the type of business entity you formed when launching your enterprise, your overall liability can be shielded somewhat, fully, or not at all. In most cases, since the IRS has powers that no one else does (and with a success rate of more than 90% in court cases), it’s not uncommon to fear the IRS when you get that dreaded collection notice in the mail.
To review, a sole proprietorship provides no liability protection for the owner, who personally rises and falls with the business. A partnership offers limited liability protection. A legally recognized limited partnership (LP) leaves control of the enterprise in the hands of a general partner who assumes all liability. In a limited liability partnership (LLP), the partners share liability but are somewhat shielded.
A limited liability company (LLC) shields all members (those who founded the company) from personal liability for legal and creditor actions. A C-Corporation (C-Corp) becomes its own separate legal entity, run by a board of directors and appointed officers who are shielded from most liability. An S-Corporation (S-Corp) is not a separate legal entity per se, and all profits pass to the founders as personal income, while they retain protection from debt collection and other actions.
The IRS and Responsible
None of those protections really matter when it comes to violations of income and employment taxes held in trust for the IRS. The Trust Fund Recovery Penalty (TFRP) can be assessed against the person who is responsible for collecting and/or withholding income and employment taxes and who “willfully fails to collect or pay them.”
The IRS website states: “A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.” Responsible persons include:
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 (PSPs) or responsible parties within a PSP
Professional employer organizations (PEOs) or responsible parties within a PEO
The IRS will interview different individuals to find the responsible person. To be considered responsible, the IRS weighs whether an individual “exercised independent judgment with respect to the financial affairs of the business.” An employee who merely pays bills as directed by a superior is generally not considered a responsible person.
Note: If you’re a sole proprietor, you are automatically deemed to be the responsible person, unless you can show otherwise through a PSP or PEO.
How Much is the TFRP in Dollars?
The Trust Fund Recovery Penalty is one of the largest fines the IRS assesses. If you withheld payroll taxes, including Social Security and Medicare contributions, and did not remit them to the IRS, the amount you failed to pay is essentially doubled. As an example, say on last week’s payroll you withheld $10,000 owed to the IRS but didn’t pay it — the IRS will assess you a $10,000 penalty on top of the $10,000 already owed, bringing the total to $20,000.
If you are deemed the responsible person, those funds might have to come from your personal assets if the business lacks the money. Your savings, bank accounts, personal possessions, and more can be levied or seized. You need to be proactive in seeking the best professional legal help available.
Rely On a Skilled Attorney for Help
If you receive notice that you owe taxes held in trust for your employees but not paid, you have options to survive and move forward. You can work out a short- or long-term repayment plan, or you can negotiate for an offer in compromise, effectively lowering the amount owed. You can also argue and strive to prove that you should not be held responsible.
Whatever course you choose, you don’t want to go it alone against the IRS. The agency has some flexibility, but you need someone experienced in dealing with the IRS to help you attain the best possible outcome.
That’s where I and my firm — Zuckerman Law LLC — come into the picture. Along with three decades of experience, I have a solid track record of dealing with the IRS and the Florida DOR, as well as representing clients in court regarding tax issues. I will meet with you, discuss your situation, and weigh all your options for you.
If you’re in Fort Lauderdale, Broward County, or the South Florida counties of Palm Beach, Miami-Dade, and Collier, call me at Zuckerman Law LLC immediately when the TFRP looms in front of you. Let’s dig you out of this hole.