HomeEach year hundreds of small business owners and large companies alike receive notice from the IRS that they are delinquent in their trust fund withholdings for their employees. In most cases these mistakes are the result of a simple oversight of financial error. Other times they are the result of a company being in financial trouble. Regardless of the reason, the IRS wants their money and they can be very harsh in getting it. If you are a small business owner and you find yourself in this situation, you need a tax attorney immediately.
When it comes to the IRS, you aren't going to convince them that it was a mistake and be allowed to take care of it. They don't care if it was an innocent mistake. They want their money, period. The longer you try to avoid the situation, the worse it will get. They IRS has years of experience in taking people's money and they are very good at getting to it. One way they go about collecting is by incurring a trust fund recovery penalty. Once they can pin the tax debt on someone, they go after them immediately.
When collecting a debt, the IRS will levy both your personal assets as well as business assets. IRS code section 6672(a) outlines the trust fund recovery penalty. The penalty is 100%. Trust funds are income withholdings that employers must by law deduct from an employee's pay. They are used to pay federal and state taxes, social security and Medicare. The money is kept in a trust until it is time to pay the IRS.
The person with the power to make the payroll deductions is responsible for paying the penalty. This could be a small business owner or partners in a larger firm. It could even be the CEO of a large company. It's basically anyone with authority over payroll funds.
This penalty is usually levied against the person who is considered the most financially responsible. There are certain IRS rules that determine who that person is. The person must have had knowledge of the unpaid tax, have somehow misused the funds and a few other factors to make the penalty hold up. A tax attorney can help you decide if you are indeed liable of some sort of tax wrong doing and what to do about it if you are.
It's not easy proving to the IRS that you are innocent, but it's possible. A tax attorney will debrief you and look for any mistakes or exonerating evidence that could get the case dismissed. If you are found guilty and are assessed the penalty, the lawyer can help arrange a suitable payment plan and may even be able to get the penalty reduced.
It's not fun to deal with the IRS but it's often part of doing business in the United States. The trust fund penalty is serious, but it can be beat. A good tax attorney is essential anytime one is dealing with the revenuers, but even more so when one's business is on the line.
About the Author:
This article was edited by Daniel Tobin, a junior editor for Ratelines.com.
Since 2004, Ratelines.com has been an independent and objective source for reliable information about the finance industry, cd rates and savings accounts.