This document discusses the hazards of unpaid payroll taxes. It begins with an overview of trust fund taxes, which are taxes employers withhold from employee paychecks for income tax and Social Security/Medicare. It notes that failure to remit these taxes can result in penalties against responsible individuals and potential criminal prosecution. It then covers topics like the trust fund recovery penalty assessed against those responsible, definitions of responsible persons and willfulness, appealing penalties, and resolving tax liabilities. It concludes with two case examples of potential trust fund penalty situations.

1. The Hazards of Unpaid
Payroll Taxes
Presented by:
Naveid Jahansouz, Esq.

2. IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by
the IRS, we inform you that any U.S. federal tax advic
contained in this document is not intended or written
to be used, and cannot be used, for the purpose of (i)
avoiding penalties under the Internal Revenue Code, o
(ii) promoting, marketing, or recommending to another
party any transaction or matter that is contained in this
document.

3. Topics
1. Overview of trust fund taxes
2. Outcome of failure to withhold and remit
trust fund taxes
3. Criminal prosecution
4. Case examples

4. What Are Trust Fund Taxes?
- Employers generally required to withhold
Federal Income taxes and Federal Income
Contributions Act (FICA) taxes from their
employees’ wages. IRC § 6157.
- FICA taxes are credited towards future Social
Security and Medicare benefits for employees.
- Once money is withheld from an employee’s
paycheck, the IRS is required by law to give the
employee credit for that money whether or not
the employer actually remits it to the IRS.

5. What Happens if an Employer Fails to
W ithhold & Remit Trust Fund Taxes?
• Collection from business
• Assessment of Trust Fund Recovery Penalty
against individuals at the business
• Potential criminal prosecution

6. Business Collections
• Under $25,000 – Eligible for 24 month
installment agreement
• Over $25,000 – Must provide financial
information and setup installment agreement
based on ability to pay
• Offer in Compromise

7. TRUST FUND RECOVERY
PENALTY

8. Trust Fund Recovery Penalty
Under IRC § 6672, individuals involved in a
business can be held personally liable for
the entity’s failure to properly collect and
remit employment taxes.

9. Trust Fund Recovery Penalty(cont.)
26 U.S.C. § 6672. Failureto collect andpayover tax, or
attemptto evadeor defeattax
Any person required to collect, truthfully account
for, and pay over any tax imposed by this title who
willfully fails to collect such tax, or truthfully account
for and pay over such tax, or willfully attempts in any
manner to evade or defeat any such tax or the payment
thereof, shall, in addition to other penalties provided by
law, be liable to a penalty equal to the total amount of
the tax evaded, or not collected, or not accounted for
and paid over.

10. Trust Fund Recovery Penalty(cont.)
“In order for an individual involved in the
business to be held liable under section 6672,
she must be ‘responsible,’ having the duty to
withhold and remit the trust fund taxes, and she
must have ‘willfully’ failed to collect and pay
over the tax due.” Godfrey v. United States,
748F.2d 1568(Fed. Cir. 1984).

11. Responsible Person
• A “responsible person” is a person who is responsible
for collecting or paying the withheld income and
employment taxes, or for payingcollected excise taxes
• Elements
– Duty to perform
– Power to direct the act of collecting trust fund taxes
– Accountability for and
– Authority to determine which creditors will or will not be
paid
• Can be assessed against more than one person
• Persons subject to the TFRP are jointly and several
liable for the taxes, alongwith the company itself

12. Responsible Person(cont.)
Some factors considered by Revenue Officers :
• Duties of officers as set forth in corporate by-laws
• Check-signingauthority on the business bank account
• Active in day-to-day management of the business
• Ability to hire and fire employees
• Duty to sign and file employment tax returns (e.g., Form 941)
• Control of payroll and disbursements
• Control of the corporate votingstock
• Ability/duty to made federal tax deposits

13. Common Examples of
Responsible Persons
• Officer of employee of a corporation
• Partner or employee of a partnership
• Corporate director or shareholder
• Member of a board of trustees of a nonprofit
organization
• Payroll service providers (PSP) or certain individuals
within a PSP
• Another person with authority and control over funds to
direct their disbursement
• Anyone with signature authority on the company account
could be investigated as a potential Responsible Person

14. Willfulness
A responsible person acts willfully by
making a “voluntary, intentional, and
conscious decision” not to collect or pay
the trust fund taxes. Godfrey, 748 F.2d at
1577.

15. Willfulness
• The person was aware, or should have been
aware, of the outstanding taxes and either (1)
intentionally disregarded the law or (2) was plainly
indifferent to its requirements.
• No evil intent or bad motive is required.
• The decision to pay other creditors while
knowing that there are delinquent payroll taxes
owed to the IRS, can be enough to establish
willfulness.

16. Potential “Responsible Person” Defenses
• Client may have signed checks, but she was
merely following orders of a boss or principal
decision maker
• Client was merely an investor and was not
involved in day-to-day activities of the
company
• Client did not have any financial decision-
makingauthority for the company
• Client may have had check-signing authority,
but never exercised it

17. Potential Willfulness Defenses
• Client was unaware that the payroll taxes had not
been paid
• Client did not have authority to determine which
creditors got paid or did not get paid
• There was no money available to pay the taxes
when they became due
• Client may have been negligent, but not willful

18. Trust Fund Investigations
• Letter sent to targets notifying them that the Revenue Officer
wants to meet with them to discuss the unpaid taxes
• Revenue Officer examines bank records, including the
signature card, copies of cancelled checks, and company
filings to determine potential targets
• Form 4180 interview for targets
• Should you allow a client to be subjected to a Form 4180
interview?
• Revenue Officers will insist, but they cannot compel without a
summons
• No requirement to sign Form 4180, though Revenue Officers
will insist

19. Form 4180 Interview

20. Appealing the TFRP
- Letter 1153
- 60 days
- Formal Protest
- IRS Appeals
- Appeals Conference
- Should taxpayer be present?
- Appeals can consider hazards of litigation
- Not “all or nothing”
- Qualified Settlement Offer (Section 7430)
- Interest does not begin to accrue until after the TFRP is
actually assessed (after unsuccessful appeal)

21. Litigating TFRP Cases
• Payment and claim for refund (Florarule)
• Divisibletax rule
• Claimsdeemeddeniedafter six months
• Refundsuit mustbe initiatedwithin two years
of payment
• Court jurisdiction

22. How to Resolve TFRP Liabilities
• Installment Agreement
• Offer in Compromise (Doubt as to
Collectability)
• Offer in Compromise (Doubt as to Liability)
• Request for Penalty Abatement (Form 843)

23. Worker Reclassification Cases
• Generally, TFRP will not be assessed in
worker reclassification cases
• No willfulness
• Exception for situations where business knew
workers were incorrectly classified

24. Sole Proprietorships and
Single-Member LLCs
• Sole Proprietors = personally liable for all
taxes owed by the business, so no TFRP
necessary
• Single-Member LLCs prior to January 1, 2009
– No corporate election = disregarded entity,
member personally liable for all taxes owed by the
business
– Corporate election = TFRP
• Single-Member LLCs post January 1, 2009

25. CRIMINAL PROSECUTION

26. Statute Comparison
26 U.S.C. §6672
Any person required to collect, truthfully account
for, and pay over any tax imposed by this title who
willfully fails to collect such tax, or truthfully
account for and pay over such tax, or willfully
attempts in any manner to evade or defeat any such
tax or the payment thereof, shall, in addition to
other penalties provided by law, be liable for a
penalty equal to the total amount of the tax evaded,
or not collected, or not accounted for and paid
over.

27. Statute Comparison(cont.)
26 U.S.C. §7202
Any person required under this title to collect,
account for, and pay over any tax imposed by this
title who willfully fails to collect or truthfully
account for and pay over such tax shall, in addition
to other penalties provided by law, be guilty of a
felony and, upon conviction thereof, shall be fined
not more than $10,000, or imprisoned not more
than 5 years, or both, together with the costs of
prosecution.

28. Burden of Proof
While the statutory elements are the same, the
important difference between civil and criminal
cases is the burden of proof. In a criminal case,
the government must prove the elements
beyond a reasonable doubt.

29. What Kinds of Cases Get Prosecuted
Criminally?
• Large dollar amount
• Repeat offenders
• Responsible parties fundinglavish lifestyle
• False statements to IRS

30. CASE EXAMPLES

31. Case Example #1
Bill, the owner of a small consulting business,
gave his mother and secretary, Gloria, signature
authority over the company bank account. He
did this for his own convenience, because he
travels a lot and is not always available to sign
checks when bills need to get paid. Gloria only
signs checks with Bill’s approval.

32. Case Example #1(cont.)
In 2016, the business fell behind on payroll taxes.
Gloria loaned the company funds from her personal
retirement account to pay some of the taxes,
because she was nervous. Nonetheless, the
business was unable to catch up. During this time
period, Gloria continued to sign checks as
instructed. Months later, a Revenue Officer
showed up and conducted Form 4180 interviews
with both Bill and Gloria.
Should the TFRP be assessed against Gloria?

33. Case Example #2
U.S. v. Montemayor, 2013 WL 4459056 (S.D. Tex)
Two owners of a home healthcare businessin Laredo,Texas,
were indicted for failure to pay over to the IRS federal tax
withholdingsandFICAtaxesallegedlywithheldfrom employees'
wages.
According to the indictment, “[d]uring the time period from
about 2006 through at least2011, the defendants[....] diverted
corporate fundsto cover nonbusinessexpenses,includingtrips,
entertainment,and the purchaseof real estate, while, at the
sametime failingto payover to the IRSpayrolltaxes….”

34. Contact Us
Naveid Jahansouz
Goldin Peiser & Peiser, LLP
214-635-2524
Njahansouz@ GPPcpa.com