South Carolina Tax Attorney

    One way the IRS is able to "pierce the corporate veil" and make the owner of a business personally liable for some of the business tax liability is through the Trust Fund Recovery Penalty.

    The Trust Fund Recovery Penalty does not make the business owner liable for the entire business liability, but it does give them a fairly substantial responsibility for the business’ taxes.  The IRS states that the Trust Fund Recovery Penalty may be assessed against someone who is responsible for collecting or paying collected income or employment taxes or excise taxes, and willfully fails to collect or pay them. 

    A responsible person or group of people are those who have the duty and the power to direct the collection and paying of the trust fund taxes.  Many times the "responsible person" may be an officer of the company, employee in charge of the payroll or with control over the funds and the ability to direct their disbursement.  For many of my clients, the "who" is the easy answer.  They are small businesses and the owners wear many hats.  Meaning, they run the business, market the business, get new clients, pay payroll, etc.  This is usually what gets them in trouble.  They have the expertise to build a house, sell real estate, litigate a complex personal injury matter, or perform brain surgery but they do not have the relevant business knowledge to know how to prepare tax returns or pay the IRS for their employees’ withholdings.

    The second part of the definition is "willfullness" of the party to fail to collect the tax or fail to pay the tax to the IRS.  In order for the failure to pay/collect to be willfull, the responsible person must have (or should have) known of the outstanding taxes and either intentionally disregarded the requirement to pay.  The responsible person also satisfies the "willfulness" requirement by being "plainly indifferent to [the law’s] requirements." 

    The IRS typically holds an "interview" where they question a potential "responsible party" to determine whether they are actually responsible.  After they have determined you are responsible you will receive a letter from them stating their determination and you will have 60 days to appeal that decision.  Once, the appeal time has lapsed, the IRS may begin taking collection action against you personally and your personal assets. 

    Now that we know who is responsible for the Trust Fund Recovery Penalty, what is the Trust Fund Recovery Penalty?  Next week…