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When a Trust Fund Tax is Escapable

Trust fund taxes (e.g. Sales and Withholding taxes, and some others (see IRM 5.7.1 para 3)) are those taxes collected at the source from a 3rd party (retail purchaser or employee withholding tax)  that is to be held in trust by the trustee, administrator, seller, employer; then remitted to the government taxing authority.

Commonly we look at Sales and Withholding taxes as Trust Fund taxes.  There is a Trust Fund  Recovery Penalty (TFRP) assessment in cases other than sole proprietors and partnerships.  The TFRP assesses a personal liability against ‘responsible persons.’  The owners of sole proprietorships and partnership general partners, are responsible persons regardless. 

When an audit takes place and it is found that the correct tax was not collected at the source as it should have been, an assessment is made upon the administrator/business for the tax that should have been collected.  The government sees it as a fiduciary error of the administrator/business and therefore the administrator/business must pay the tax.

In that case many State and local jurisdictions see that assessment as a non-trust fund tax since it was not collected at the source from a third party (purchaser or employee).  The tax is still a valid tax debt but not an assessable personal liability against responsible persons.  In the case of sole proprietors and general partners, they are personally liable.

At the Federal level Trust Taxes are typically withholding taxes, and some others (see IRM 5.7.1 para 3).  If the correct tax was not withheld from the employee it not assessable against the business.  The business may be assessed a penalty for an administrative or fiduciary error.  The withholding tax will ultimately be the liability of the employee when that person files a tax return.  There may be many legitimate reasons why withholding taxes were under withheld.

Tip:  At the Federal level, if a valid trust fund tax is not assessed against responsible person(s) within 3 yrs of the assessment of the trust fund tax, then the IRS cannot hold such person(s) responsible thereafter.  See IRM




Taxpayers Can Now Access Their IRS Tax Transcripts Online 

LedgerGet a record of your past tax returns, also referred to as transcripts. IRS transcripts are often used to validate income and tax filing status for mortgage applications, student and small business loan applications, and during tax preparation.

You can download and print your transcript immediately, or request the transcript be mailed to your address on record.



The IRS continues to target S-Corporations (Dec 2013)

S-Corporations are small businesses with a narrow span of control by the owner/employees. They don’t always follow the rules for holding the appropriate meetings, board of directors, etc. They are pretty much run as the owner(s) see fit. They may sometimes skirt the tax law hoping to avoid detection due to perceived complexity. Well, the IRS agents/investigators are pretty sharp and receiving further training on what closets to look in.

S-corps will sometimes deduct items that are not really appropriate due to applicability to business need and timing. Another troublesome area is the age old conflict about employee vs. independent contractor status of workers.

It is inviting to treat workers as independent contractors as the employer avoids paying the employer’s share of unemployment tax, the administrative burden of payroll, workers’ comp, and other insurances. There may be other employment costs and they can vary from State to State.

The IRS and States are interested in this issue and correct classification of workers. A lot of State Unemployment Tax Departments seem to be pretty talented at sniffing out the misclassified workers. Then the State Departments of Revenue and the IRS pick up on that full speed.

The government is keen to make taxes payable at the highest administrative level to minimize compliance issues (non-filing and non-payment). When individuals are left to manage that on their own they have a tendency to fudge a little if their cash flow is a bit tight, or they have a desire to purchase something that doesn’t really fall into the correct priority. Is that $150,000 speed boat more important than paying your estimated tax bill this quarter? I have to admit myself, that speed boat sounds like more fun than paying a tax bill that doesn’t have a tangible value. But, I would be wrong to buy that boat.

For 10 Tips for Business Owners on classifying workers, click here.


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