Trust Fund Penalty

Today TaxMama hears from Steve in the TaxQuips Forum with a big problem. He says, “The IRS wants me to sign a trust fund recovery form accepting personal responsibility for corporate 941 back taxes. They are making this a requirement as part of a full pay installment agreement. They are telling me that they will assess me even if I don’t sign. What happens if I don’t sign the form?”

Dear Steve,

As Brian Lehrhoff, EA in Fair Lawn, NJ, says, if you were a responsible corporate officer, you don’t sign the agreement, IRS can lien and/or levy to collect their money. Brian is right, trust fund monies are considered sacred.

To understand why, you need to understand what the trust fund penalty is. The Trust Fund Penalty is the amount of money you withheld from your employees’ paychecks – for THEIR share of FICA, Medicare and income tax withholding.  The IRS, the government, the courts, and anyone with a brain, consider it THEFT when you do not pay in the funds you deducted from your employee’s paychecks to cover THEIR own taxes.  That was not your money to spend.

So if you want IRS to reduce your taxes on that installment agreement, or to accept your installment agreement, you will most likely need to accept responsibility for the trust fund penalty. After all, there is no way to make the trust fund penalty go away.  You can’t bankrupt it, either. (Of course, you can refuse to sign and just borrow the money to pay IRS from somewhere else – and fight the penalty, if you think someone else is responsible.)

The ONLY thing to consider is – who else is responsible for not paying those taxes? Can you get them to cough up some of that money? If you can’t get it yet – do you think you can get it from them in future?

What you may want to do is sign the IRS forms and in the meantime, sue your partners/officers to get some or all of that money back from them.

 IRS, of course, will collect from anyone whose assets they can find. Getting it back will be up to you.

And remember, you can find answers to all kinds of questions about tax debt and other tax issues, free. Where? Where else? At www.TaxMama.com.

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