Archive for Trust Fund Recovery Penalty
May 17, 2012 John R. Dundon II Business Expense, Deductible Expense, Disallowed Expenses, Employee Business Expense, Employment Tax, IRS Enforcement, IRS Examination, Tax Abuse, Tax Deductible Expenses, Tax Guidance & Preparation, 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 5.7.5.3.1. 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.
June 22, 2010 John R. Dundon II Employment Tax, IRS Penalties, IRS Penalty and Interest Abatement, Payroll Tax Problems, Self Employ, Small Business, Social Security Tax, Sole Proprietor, Sub-chapter S, Tax Abuse, Trust Fund Recovery Penalty Shareholder Timothy McCloskey was assessed a trust fund penalty due to an unfortunate problem he had with his trusted bookkeeper and chief financial officer, Kathleen Lawson.
On September 1, 2004, Kathleen left Timothy an apologetic letter of resignation. Upon reading it, Timothy knew that she had embezzled funds, but did not know how much. He immediately made an inquiry to the IRS and was informed, by letter, that employment tax returns had not been filed for 19 quarters.
Within a month of her departure, Timothy was able to determine the amount of Kathleen’s embezzlement from his company to be approximately $800,000. However, it took Timothy and his relatives several months to figure out where Kathleen hid the IRS notices. They eventually discovered the completed tax returns and IRS delinquency notices hidden in the ceiling tile in Kathleen’s former office.
Once Timothy became aware of the magnitude of Kathleen’s embezzlement, he knew he could not keep his corporation in business. He consulted his attorney about filing for bankruptcy, but was told he did not have the necessary assets to file for bankruptcy. His attorney further advised him to begin winding down the business by paying his creditors, employees, and himself at a reduced rate. Following his attorney’s advice, he paid out over $348,320 to the corporate creditors, vendors, employees, and himself. But he did not pay the $268,377 in delinquent employment tax to the IRS.
On November 1, 2004, Timothy began liquidating the corporation. He entered into an agreement to sell the inventory for $240,000. He used those proceeds to pay off a personally secured corporate loan. Between September 3, 2004, and January 31, 2006, Timothy’s corporation paid out $828,143 from funds the corporation received for goods and services provided prior to September 6, 2004.
Finally, on March 1, 2005, Timothy signed and mailed the Form 941 employment tax returns for the 19 delinquent quarters. On September 12, 2005, the U.S. Treasury made assessments against Timothy, pursuant to §6672, for failure to truthfully account for or pay over the federal income and employment taxes withheld from the wages of his corporate employees for the 19 quarters at issue.
He paid $51,302 to satisfy the debts for the three tax periods ending June 30, 2000, through December 31, 2000. However, that still left $325,695 to be paid for the remaining 16 quarters in addition to penalties, accrued interest, and costs. Accepting the fact that he was a “responsible person,” Timothy claimed he did not willfully fail to pay the $268,377 of withholding taxes and therefore is not personally liable. He cited numerous cases to avoid the “willful” label, but the
Tax Court did not agree with his interpretation.
After learning of the tax delinquencies, and before remitting a partial payment to the IRS, Timothy paid “substantial sums” to creditors other than the IRS, even after receiving an IRS letter verifying that taxes were owed. The fact that he did not know the exact amount due was not considered a valid excuse.
However, the Tax Court stated that willfulness is established when a responsible person uses corporate funds to satisfy debts with other creditors after acquiring knowledge of an IRS delinquency. No evil motive or fraudulent purpose is needed. Timothy’s status as sole shareholder and company president came with a duty to ensure that trust taxes were in fact being remitted by his company. He crossed the line as soon as he paid other creditors first instead of satisfying the employment tax debt to the IRS.
Every employer has the responsibility to deposit trust fund taxes in a timely manner. Those funds are not to be used for any other purpose as the employer has been so entrusted.
March 16, 2010 John R. Dundon II Employee Business Expense, Payroll Tax Problems, Self Employ, Small Business, Social Security, Social Security Tax, Sole Proprietor, Sub-chapter S, Tax Abuse, Tax Deductible Expenses, Tax Guidance & Preparation, Tax Problems & Requests, Tax Relief, Trust Fund Recovery Penalty, Unemployment, Wage Garnish The IRS uses the common-law factors listed below to determine whether a worker is an independent contractor or an employee. All the factors below must be taken into consideration in determining worker classification
Instructions. An employer should not tell an independent contractor how to do a job.
Training. An employer should not provide substantial training for an independent contractor.
Integration. An independent contractor should not be hired to provide a service that is an essential part of an employer’s business.
Personal Services. An employer should not insist that the work be performed by the contractor rather than someone that the contractor may hire.
Assistance. Independent contractors control and pay their assistants.
Length of relationship. Independent Contractors should not have a continuing relationship with an employer unless there are multiple contracts.
Work hours. An independent contractor usually determines the hours worked to complete a job.
Amount of work. An independent contractor should not be told to work fulltime for an employer if that would prevent the contractor from doing other work.
Location. Unless ther services can be performed only in one location, an independent contractor chooses where to do the work.
Sequence of work. Independent contractors determine the order in which they are to accomplish tasks.
Reports. Independent contractors should not be required to produce interim reports.
payment.
Independent contractors are paid for the results of their work, not for the time worked.
Expenses. Independent contractors are responsible for their business expenses.
Tools. Independent contractors are typically provide their own equipment and tools.
Investment. An independent contractor has a significant investment in his business.
Profit. Independent contractors realize profits and incur losses on each job.
Multiple jobs. Independent contractors can work for more than one employer at a time.
Availability. Independent contractors usually can make their services available to the general public as the wish.
Termination. Independent contractors can not usually be fire at will, as can employees.
Liability. Independent contractors are liable for failure to complete a job.
