Archive for Trust Fund Recovery Penalty
Tool and Equipment Plans generally require employees to provide their own tools. Some plans purport to receive tax-favored treatment as “accountable plans” under the definition of adjusted gross income in Internal Revenue Code § 62(c). If you are expected to use your own tools and equipment on the job and get reimbursed be very careful in understanding the definition of an “accountable plan” because the Internal Revenue Service has established a compliance team to address significant concerns with certain Employee Tool and Equipment Plans that purport to receive tax-favored treatment as accountable plans. It’s all spelled out in the Alert. Here’s the facts as I understand.
1. According to ILM 201120021 a reimbursement or other expense allowance arrangement that pays an amount regardless of whether an expense is paid or incurred or reasonably expected to be paid or incurred by the employee in performing services for the employer violates the business connection requirement of an accountable plan under Treas. Reg. § 1.62-2(d)(3)(i). Accordingly, payments made under the arrangement are treated as made under a nonaccountable plan. Amounts treated as paid under a nonaccountable plan must be included in the employee’s gross income for the taxable year, are subject to withholding and payment of employment taxes, and must be reported as wages or other compensation on the employee’s Form W-2.
2. The IRS’ Chief Counsel issued the following Advice – ILM 200745018 concluding that an employer’s tool reimbursement plan does not satisfy the requirements of an accountable plan.
3. IRS Revenue Ruling 2005-52 holds that tool allowances paid to employees are not paid under an accountable plan because the substantiation and return of excess requirements are not met.
4. A Coordinated Issue Paper Revised on July 2,2008 concludes that Employee Tool and Equipment Plans under which amounts are paid to employees for the use of their tools and equipment, do not meet the accountable plan requirements.
5. An IRS Private Letter Ruling (200930029) states that an employer’s expense reimbursement plan satisfies the business connection, substantiation, and return of excess requirements of an accountable plan. Payments made under the Plan were allowed exclusion from the Technician’s income and not considered wages subject to the withholding and payment of employment taxes because the Plan only reimbursed covered costs that the Technician substantiated.
If you are an employer that requires your employees to provide their own tools you may want to review and understand this private letter ruling and only provide reimbursement for tool expense upon written substantiation (aka receipt). It is best practice to understand the nuances of accountable and nonaccountable tool and equipment plans. A blanket payment made to an employee on a regular and consistent basis is usually considered income subject to employment tax regardless of what it is called.
Here are 5 things I learned through experience regarding TFRP:
1. An IRS Revenue Officer makes a determination to “assess” or “not assess” the Trust Fund Recovery Penalty (TFRP). Bankruptcy does not stop the Assessment Statute even though it can stop the Collection effort. One of the major reasons why an IRS Revenue Officer won’t assess the TFRP is doubt as to collectability. If you are filing bankruptcy you are showing everybody including the IRS that collectablity is a problem and maybe the TFRP should be not be assessed. However Revenue Officers and their managers can and sometimes will pursue the penalty even with doubt as to collectability.
2. Appeal the determination under CAP, CDP. When an IRS Revenue Officer sends you the initial letter (L1153) it contains appeal rights. Ultimately if you go to IRS Appeals you take the case out of the hands of the IRS Revenue Officer and his or her Manager who are trained to advocate aggressively on behalf of the government’s position and into the hands of an IRS Settlement Office who approaches making a determination from a neutral perspective taking into consideration the hazards of litigation. Generally speaking I have found that most IRS Settlement Officers are impartial and very good at what they do. To date, I rarely have had a problem with a Settlement Officer’s knowledge and fairness. Be sure to know what is expected of you in terms of timely responding as your rights expire if you do not respond within the required parameters. Appealing under Collection Appeal (CAP) won’t stop enforced collection action and you loose the right to petition Tax Court if an adverse determination is made by the Settlement Officer. The CAP basically gives you the opportunity to tell your side of the story.
3. Ask for your trust fund recovery penalty file under the Freedom of Information Act (FOIA). With this you will be able to verify the evidence the IRS has accumulated in order to assess you as a willful and responsible party for failure to pay Trust Fund Taxes. Be sure to ask for the main file not just your tax file. The main file will have the bank information and alledged evidence against you.
4. To prove doubt as to liability file IRS Form 656-L Offer In Compromise – Doubt as to Liability. Show that you did not have control or shared control particularly of the checkbook or payroll. The risk is that unless you have a solid case you will receive a judgment that will be good for 20 years instead of an assessment good for 10 years. Additionally if claiming this doubt exists you do not have to submit financial statements or pay the application fee.
5. To prove doubt as to collectibility according to Internal Revenue Manual Section 220.127.116.11.1. Basically if you are disabled or about to retire on Social Security and have little in terms of liquid assets you have a case. If you have the opportunity to get back on your feet or have reasonably substantial assets, you usually don’t.
I received an interesting call today from a small business employer who was reported to the IRS by a disgruntled past worker who claimed that he was paid as an independent contractor (and received IRS Form 1099) when in actuality he believed himself to be an employee (that should have received IRS Form W-2) for tax reporting purposes.
This prompted me to post about the new Voluntary Worker Classification Settlement Program. Having created well over 300 living wage jobs with benefits for people over the years I’ve grown to believe that most people roaming the planet today have no idea about the risks associated with that effort. The biggest risk in my opinion is associated with properly classifying workers as either employees subject to employment tax obligations or independent contractors whereby the worker is responsible for paying their own self employment tax. In the past the IRS has closed down the most well meaning business operations because improper worker classification created very large employment tax liabilities and heavily burdensome Trust Fund Recovery Penalties. The biggest risk I think is when a worker classified as an independent contractor gets injured on the job and doesn’t have his/her own insurance coverage or when a worker classified as an independent contractor becomes disgruntled and decides as a parting blow to report his/her ‘boss’ to the IRS or the US Treasury.
To alleviate that pain and mitigate some risk associated with one of thousands of decisions that job creators routinely make IRS Announcement 2011-64 gives businesses an opportunity to reclassify independent contractors as employees going forward.
IRS Form 8952 is used by businesses to apply for this reclassification opportunity. A business that applies for and is accepted into this program:
1) Receives audit protection backwards in connection with these reclassified workers,
2) Pays only 10% of the normal employer tax liability that may be due for the most recent tax year, and
3) Is not liable for interest and penalties on the amount.
In exchange the business gives IRS a six-year statute of limitation on the following three years’ employment taxes.
To be eligible:
1) The business cannot currently be under audit by IRS, the Department of Labor, or a state or local agency. If the business has previously been audited, the business has to be currently complying with the directions of that audit.
2) The business must have consistently treated the workers as independent contractors.
3) The business must have filed all Forms 1099 for the prior years.