Can I be held personally liable for unpaid 941 employer withholding taxes? What can be done to avoid this/protect personal assets/income?
If you are an owner, officer, check-signer or decision-maker at a business that is behind on 941 taxes, you are at risk of being personally assessed with a penalty – called the Trust Fund Recovery Penalty – equal to the amount withheld from the employees’ paychecks, and that is not turned over to the IRS. More than one person can be a responsible party within a business that owes 941 taxes. Note that this penalty is not necessary for sole proprietors and partners in unlimited partnerships, as they are already personally liable for all unpaid IRS 941 taxes. However, non-owner employees of sole proprietorships and unlimited partnerships can be subject to the Trust Fund Recovery Penalty if they fit the relevant criteria.
Under Internal Revenue Code Section 6672, the IRS can assess any “responsible party” who “willfully” failed to withhold the “Trust Fund” portion of the 941 liability, and send it to the government. The word “willfully” has a much broader meaning in this context than many people realize. For example, if a responsible person intended to pay the trust taxes, but was unable solely due to lack of funds, this is likely not enough to support a claim that they were not “willful” under the law.
The Trust Fund is the portion of the 941 liability that is withheld from the employees’ gross payroll, and due to the IRS in the form of 941 tax deposits. It does not include penalty, interest, or the Medicare/Social Security employer-matching portion of the 941 taxes (though, once the Trust Fund Recovery Penalty is personally assessed, it will begin to accrue interest of its own).
In order to assess this penalty, an IRS Revenue Officer (RO) does an investigation to find responsible parties within a business. The RO goes by a number of “indicators of responsibility,” which help him or her decide who is responsible. If you are an owner (even a 1% share), an officer, or if you have ever signed checks or tax returns for the business, you are an obvious target for the IRS. Keep in mind that just because you may have filled one or more of these roles does not necessarily mean that you were “willful and responsible” under Section 6672. Seek professional assistance to help you determine your risk of personal exposure and to take action to reduce that risk if appropriate.
Furthermore, innocent employees who lack significant financial control of a particular business entity have been assessed with the Trust Fund Recovery Penalty, simply for being heavily involved with the business, loaning the business money, or even by being the main point-of-contact for the IRS. People falling into this category should be alert to the risk, and protect themselves if they end up in the government’s crosshairs.
The best way to protect yourself from this penalty is to avoid assessment in the first place. If you are an employee at a business where 941 taxes are not being paid, it is a good idea to make sure you are not a check-signer, and avoid participating in activities that may make it appear as though you have some power over whether these 941 taxes are paid. If you are an officer at a business where this is happening, consider resigning your position as officer, if possible, and go on the record insisting that the trust fund taxes be paid. (Naturally, if the Trust Fund portion of the tax liability can be paid off in full, then the IRS will not assess anyone personally.)
If the RO wishes to conduct a trust fund interview with you, and you believe you were not willful and responsible, you should hire competent counsel to assist you in answering the Revenue Officer’s questions during the interview process (commonly called the “4180 interview” or “Trust Fund Interview”). Your interview answers can be used against you to support the government’s findings, and some RO’s will question potentially responsible persons in a fashion that is designed to elicit damning responses.
If, after the independent investigation and the interview, the RO still believes you are responsible and willful, you will be given the opportunity to appeal this determination. Keep a sharp eye on your mailbox at home (or your “last known address” to the IRS). The RO will send you a letter, marked “Letter 1153” in the lower right-hand corner of page 1, in which the RO proposes to assess you with the Trust Fund Recovery Penalty. You will have 60 days from the date on that letter to send in a protest and challenge this proposal. The last page of the Letter 1153 is the “Form 2751.” This form will tell you how much the Trust Fund portion is. The amount you would owe is in the bottom right corner, under the column titled “Penalty.”
If you receive this letter, and you feel you are not responsible, it is imperative that you appeal – or “protest” – this letter as soon as possible. If you miss your protest deadline, the IRS generally will not grant you another opportunity to protest, and you will almost certainly get assessed. If possible, it is best to hire competent counsel to prepare your protest and argue your case. If your protest is postmarked on or before the 60-day deadline, then the IRS must consider your protest, and refrain from assessing you until you have had an opportunity for a hearing. Your protest may be forwarded to IRS Appeals, where a Settlement Officer may hold a hearing to determine whether the RO made a mistake in proposing to assess you.
It is best to make your protest as detail-oriented and well-organized as possible, and cite the legal authority you believe supports your argument. It may also be wise to submit additional evidence, such as sworn affidavits from coworkers, documents, records, etc. that tend to refute the assertion that you were willful and responsible. For these reasons, and because the stakes are usually high, it is a good idea to engage competent and experienced counsel to prepare, draft, and argue your protest.
Finally, if you lose your protest, and you are assessed, all is not lost. You can still negotiate for an affordable installment agreement, file for an Offer in Compromise, or request that your account be placed in “Currently Not Collectible” status if the company is in the process of paying back the tax liability or if you are otherwise eligible. You can also challenge the assessment in court so long as your petition is timely filed. In some cases, an RO will even refrain from assessing an individual so long as the company is current with a payment plan. Make sure to get competent advice about which one of these avenues to choose.
-Jeremy Dickman, Esq., Tax Attorney