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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 5.7.3.5
Resources:
Taxpayers
Can Now Access Their IRS Tax Transcripts Online
Get
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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Basically
Google or Bing it.
The IRS' own search engine is rather poor and confusing to use. It brings up
a lot of extraneous information and adds confusion.