In my last blog post, I explained what trust funds and trust fund recovery penalties are and why a business owner should consider these things before deferring payroll taxes under the President’s EO, or even worse, paying other creditors with the employees’ withheld payroll taxes.
In this post, I will explain what to do when you are faced with a trust fund assessment and recovery penalty when you are not the responsible person and explain the options available to resolve the trust fund issues.
When the IRS sends you a proposed trust funds assessment IRS Letter 1153, there are four ways to challenge the assessment:
- Protest the assessment in the Letter 1153 if you are within the 60-day window to make the protest. This is the best way to challenge the assessment but timeliness is key.
- File a Doubt-as-to-Liability Offer in Compromise (“DATL”) and challenge the assessment. This is the second-best option when the 60-day protest window has passed. This requires you to offer an amount to settle the liability and to pay filing fees for the Offer in Compromise.
- Request Audit Reconsideration. This is very similar to filing a DATL but IRS collections is not put on hold. You, or your tax attorney, needs to keep calling the IRS for a collections hold while the request is being done. One good thing about Audit Reconsideration is that you can get your money back if the IRS finds you are entitled to the refund. Thus, you can request for an Audit Reconsideration when you already paid money or if the IRS levied your assets.
- File a Refund Claim. This is the most expensive option and is done when the first two options cannot be done. The reason this option is expensive is because you have to pay the payroll taxes for each quarter you wish to challenge and then seek a refund for the money you paid. When six months pass or when your refund claim is rejected, you file a suit in United States District Court or the United States Federal Court of Claims for the refund, which costs you more in legal fees.
Whichever option you pick, you will need to argue why you are not responsible for the trust fund assessment. The best way to show that you are not the responsible person is to show that you did not have signature authority on the business funds and checks. This can be done by providing the IRS with cancelled checks, bank records, bank signature cards, and even affidavits from former employees.
But what can you do if you are the responsible person?
If your business is still bleeding money and if there is no way to pay back the taxes, then it may be best to shut down the business. When the business is shut down, the non-trust fund portion of the outstanding balances are eliminated. However, the IRS will come after you for the trust fund portion of the taxes. With the business shut down, you may be an Offer in Compromise candidate or you can request an Installment Agreement or Currently Not Collectible status.
Payroll tax liabilities are just like income tax liabilities where you can resolve them through the main resolution options: Currently Not Collectible, Installment Agreement, and Offer in Compromise. But first, you must be in full compliance for the IRS to start working with you on these options.
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