In a major win for taxpayer rights, the IRS recently agreed to abate a massive trust fund recovery penalty (TFRP) against a former corporate officer, saving the individual millions of dollars. The case highlights the critical role of the Taxpayer Advocate Service (TAS) in ensuring fairness during IRS proceedings and demonstrates the real-world impact of the Taxpayer Bill of Rights.
What are trust fund taxes?
Trust fund taxes refer to income, Social Security, and Medicare taxes withheld from employee wages. Employers must hold these amounts in trust until they are deposited with the federal government through federal tax deposits (FTDs).
If a business fails to pay these withheld taxes, the IRS can assess a trust fund recovery penalty (TFRP) against responsible individuals, such as owners, officers, or others with financial control. These penalties can be severe and often personally financially devastating.
How the COVID-19 pandemic affected trust fund liabilities
Under Section 2302 of the CARES Act, employers were allowed to defer the employer’s share of Social Security taxes from March 27 to December 31, 2020. However, deferred taxes still had to be paid eventually. If they were not, the IRS could pursue TFRP assessments against responsible parties.
In this case, the officer’s company deferred the employer’s share as permitted. After the officer resigned, the company failed to repay the deferred taxes, triggering IRS action.
How the IRS pursued the officer
After the failure to pay, the IRS:
- Assessed a TFRP for the corporation’s unpaid trust fund taxes against the former officer.
- Proposed a TFRP penalty for the subsidiary corporation as well.
The officer, unaware of any liability during his tenure, faced the risk of a multimillion-dollar penalty despite leaving before the problem arose. Fortunately, he contested the assessment through the IRS Appeals process.
TAS steps in to advocate for relief
The Taxpayer Advocate Service (TAS) assisted the officer’s legal representative in crafting a strong appeal. They demonstrated that:
- The officer had fulfilled his duties appropriately during his time at the company.
- He had no knowledge of future defaults by the business after his departure.
- The application of the FTDs to the employer’s portion first was misleading and created an unintended penalty.
Thanks to TAS’s advocacy, the IRS:
- Abated the corporate TFRP, fully eliminating the officer’s assessed liability.
- Declined to assess the proposed penalty for the subsidiary.
This outcome saved the taxpayer millions and underscored the importance of understanding your rights when dealing with the IRS.
The role of the Taxpayer Bill of Rights
This case is a textbook example of why the Taxpayer Bill of Rights, adopted in 2014, is vital. Key rights involved include:
- The Right to Pay No More Than the Correct Amount of Tax: Taxpayers must not pay more than what they legally owe.
- The Right to Challenge the IRS’s Position and Be Heard: Taxpayers have a right to raise objections and expect a fair response.
- The Right to a Fair and Just Tax System: The IRS must consider each taxpayer’s circumstances.
TAS’s successful intervention reflects these principles in action, ensuring the officer paid only what was truly due — which, in this case, was nothing additional.
Why IRS relief programs matter
The IRS offers several relief programs that can help taxpayers facing unjust penalties or hardship. These include:
- Innocent Spouse Relief
- Offer in Compromise
- Penalty Abatement
- Trust Fund Recovery Penalty Appeal
In this instance, a combination of procedural appeals and vigorous taxpayer advocacy led to complete penalty relief.
Key takeaways
- Trust fund taxes are serious obligations, but relief options exist when penalties are wrongly applied.
- The Taxpayer Advocate Service can be instrumental in achieving fair outcomes with the IRS.
- Understanding the Taxpayer Bill of Rights can protect taxpayers from unjust treatment.
- IRS relief programs can save taxpayers millions when properly utilized.
Taxpayers facing IRS disputes should seek qualified help early and explore their full range of rights and remedies. No one should pay more than they legally owe.
This content is brought to you by the FingerLakes1.com Team. Support our mission by visiting www.patreon.com/fl1 or learn how you send us your local content here.