Most individuals have never heard of U.S. Code 6672 — also referred to as “The Responsible Officer Tax” — until they are faced with an impending IRS investigation. The IRS has the right to collect the trust fund recovery penalty (TFRP) against individuals of corporations who failed to pay payroll taxes. The penalties are established to encourage payment of withheld income taxes, including social security taxes and collected excise taxes. Congress passed a law that provides for the “trust fund taxes” — so called because the employee’s taxes are held in trust until you make a federal tax deposit in that amount. Unfortunately, if your company neglects to make this tax payments, the IRS may come after you. The business does not have to have stopped operating in order for the Responsible Officer Tax to be assessed.
Who Can Be Held Responsible for the Responsible Officer Tax?
The responsible officer tax may be assessed against any person who:
- Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes; and
- Willfully fails to collect or pay them
For willfulness to exist, the responsible person:
- Must have been, or should have been, aware of the outstanding taxes; and
- Either intentionally disregarded the law, or was plainly indifferent to its requirements
For example, choosing to use funds to pay creditors while the business is unable to pay the employment taxes is an indication of willfulness.
How do I Know if I am I Responsible?
You will likely be asked to complete Form 4180 to determine the scope of your duties and responsibilities within the company. The main determining factor is whether or not an individual exercised independent judgment when handling the financial affairs of the business. This means that an employee is not a responsible person if the employee’s duties included pay the bills as directed by a superior, as opposed to determining which creditors would or would not be paid on his own.
In performing your duties for the company do you:
- determine financial policy for the business?
- direct or authorize payments of bills to creditors?
- open or close bank accounts?
- guarantee or co-sign loans?
- sign or counter-sign checks?
- authorize payroll?
- authorize or make Federal Tax Deposits?
- prepare, review, sign, transmit payroll tax returns?
If you said “Yes” to any of the above, there is a chance that you could be found to be a “responsible officer”. This is not an exhaustive list, and the IRS handles it’s decisions on a case-by-case basis. The IRS will secure statements from many persons, as well as pulling the corporate resolutions, bank signature cards and canceled checks of the corporation to determine who the responsible persons are.
How does the IRS Determine the Penalty Amount?
The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on the unpaid income taxes withheld, the employee’s portion of the withheld FICA taxes. Any timely payments will be subtracted from the amounts owed, as well as any taxes designated to “trust fund only”.
There are three main ways to combat the Responsible Officer Tax penalty:
- file an appeal
- file an 843 Claim after the tax is assessed
- file an Offer in Compromise (OIC)
Contact a Rockville Maryland Tax Issues Attorney
To learn about typical procedures in a Responsible Officer Tax case, contact our office to schedule a free initial consultation. Call us today at 301-731-3303, or fill out a contact form through this site and a representative from our firm will contact you shortly.