Tax Problem Attorney Blog

Internal Revenue Code § 6672 provides that so-called responsible persons who willfully fail to pay corporate payroll taxes may be held personally responsible for the payment of the trust fund portion of these taxes. Internal Revenue Code § 6672 is sometimes referred to as the trust fund recovery penalty (TFRP). Who is a responsible person? As the court in Horovitz v. United States (WD PA 2008) explained: “responsibility is a matter of status, duty or authority.” The definition of responsible person is not limited to the person with the final say on which bills get paid, but includes others as well.

Horovitz illustrates the principle that more than one person can have liability for the trust fund recovery penalty. The CFO was deemed to be a responsible person since he had the full authority to sign checks, could hire and fire employees, signed payroll tax returns, was a corporate officer, and a 20% owner. The CEO was also held liable for the trust fund recovery penalty since he invested several million dollars in the business, owned 80% of the stock, had unlimited hiring and firing ability and check writing authority, and served as the CEO with day to day involvement in the business.

If you have payroll tax problems, and the IRS is threatening to impose the trust fund recovery penalty contact the Los Angeles, California tax litigation lawyers at Brager Tax Law Group, A P.C.

Posted by Dennis N. Brager | Permalink | Email This Post

Posted In: Payroll Tax Audits , Payroll Tax Problems , Tax Disputes

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The California Employment Development Department (EDD) announced that it will be exchanging payroll tax information with the Internal Revenue Service (IRS) . The EDD is the state agency which includes in its duties making sure that employers withhold and payover state payroll taxes. The EDD programs include payroll tax audits of business owners to make sure that all workers who have been treated as independent contractors are truly independent contractors, and not employees. In determining whether workers are properly classified the EDD sometimes relies on the 20 factor test set forth by the IRS in Rev. Proc. 87-41. It also relies on a 9 factor test set forth in the California Supreme Court case set forth in Tieberg v. California Unemployment Insurance Appeals Board (1970), 2 Cal. 3d 943 P. 2d 975; 88 Cal. Rptr. 175. The factors listed are:

1) Whether or not the one employed is engaged in a distinct occupation or business;

(2) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of a principal or by a specialist without supervision;

(3) The skill required in the particular occupation;

(4) Whether the employer or the worker supplies the instrumentalities, tools, and place of work for the person doing the work;

(5) The length of time for which the person is employed;

(6) The method of payment, whether by the time or by the job;

(7) Whether or not the work is part of the regular business of the employer;

(8) Whether or not the parties believe they are creating an employer-employee relationship; and

(9) Whether the principal is or is not in business.

Although the EDD has supplied information from its payroll tax audits to the IRS for many years, the IRS has not been particularly efficent at using this information to start its own payroll tax audits. Whether or not this new agreement foreshadows an increased degree of enforcement by the IRS is unknown. However, it underscores the risk of not contesting an EDD payroll tax audit. For more information about filing an appeal of an EDD payroll tax audit see our article

If your company has been contacted the EDD for a California payroll tax audit or has other California payroll tax problems contact the California tax lawyers at Brager Tax Law Group, a P.C.

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Posted In: California Payroll Tax Problems , Payroll Tax Audits , Payroll Tax Problems

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The Internal Revenue Service (IRS) ( has reversed its previous lenient policy of allowing the IRS Appeals Division to consider untimely protests of the Trust Fund Recovery Penalty (TFRP). First, what is a trust fund recovery penalty? Actually, its not really a penalty. It’s simply a collection tool that the IRS uses to collect payroll taxes owed by corporations. Under Internal Revenue Code § 6672 the IRS may collect the trust fund portion of the taxes owed by a company from so-called responsible officers who willfully fail to collect or pay over payroll taxes.

The TFRP used to be known as the 100 per cent penalty, but the name probably created too much confusion so it was changed. Before the TFRP can be collected from an individual the IRS must issue a 60 day letter, allowing for a tax appeal to the IRS Appeals Division. In the past IRS procedures provided that even if a protest was filed late it would be forwarded to the Appeals Division for review. See IRM 5.7.6.1.6(5) (04-13-2006)

The IRS has issued an internal memorandum which provides that if the tax appeal is not filed in a timely manner than the case will not be heard. It’s definitely not the kinder gentler IRS.

If you receive any notice from the IRS its very important that you respond in the manner set forth in the notice, and during the stated time frame. If you fail to do so you may lose important rights.

If you have received a notice from the IRS that you may owe payroll taxes totaling over more than $75,000 contact Los Angeles, California tax problem lawyer Dennis Brager.

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Posted In: Payroll Tax Audits , Payroll Tax Problems

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Small businesses which get behind on their debts also often fail to pay their payroll taxes resulting in payroll tax problems for the owners. Not paying payroll taxes is a big mistake since the Internal Revenue Service (IRS) can collect the trust fund portion of the payroll tax debt from responsible officers of a corporation under Internal Revenue Code § 6672. Not all corporate shareholders , however, are necessarily persons liable for trust fund taxes under Internal Revenue Code § 6672. For example, if the payroll tax problems were concealed from the owner he might not be personally liable. Some tax lawyers may have thought that an LLC would provide similar protection for its members, but that’s not always true.

According to the Second Circuit Court of Appeals in New York that’s not the case for a sole member of an LLC. McNamee v. IRS, 488 F. 3d 100 (2nd Circuit 2007). McNamee, who was apparently an accountant (I don’t know whether he was a CPA), represented himself in court, and didn’t have a tax lawyer. McNamee was the sole member of a limited liability company formed under Connecticut state law. Like most states, Connecticut provides that a member of a single owner LLC is generally not liable for its debts.

IRS regulations allow single-owner limited liability company to choose whether to be treated as a corporation--or to be disregarded as a separate entity. If an LLC elects to be treated as a corporation the owner is subject to double taxation--once at the corporate level and once at the individual shareholder level. On the other hand, the LLC may chooses not to be treated as a corporation, either by affirmative election or by the failure to make any election. In the later instance IRS regulations provide that the LLC is disregarded, and that the member is fully liable not just for the trust fund taxes, but all the payroll taxes including interest and penalties accrued on the overdue payroll taxes. The Second Circuit Court of Appeals found that the IRS regulations were valid, and in so doing hit McNamee personally with a large tax debt.

The rules are different for a multi-member LLCs which is classified by default as a partnership. According to IRS Revenue Ruling 2004-41, absent special circumstances such as transferee liability, members of such entities are not personally liable for payroll tax debts of the LLC without a separate assessment by the IRS under Internal Revenue Code § 6672.

If you or your company has a tax dispute contact Brager Tax Law Group, A P.C. Our tax lawyers represent companies and individuals all over California including Los Angeles County, Orange County, the Inland Empire, San Bernardino County, and Riverside County including the cities of Newport Beach, Laguna Beach, San Juan Capistrano, San Clemente, Mission Viejo, Laguna Niguel, Laguna Hills, Dana Point, Huntington Beach, Long Beach, Costa Mesa, Anaheim and Santa Ana with payroll tax problems with the California Employment Development Department (EDD), and the IRS.

Posted by Dennis N. Brager | Permalink | Email This Post

Posted In: Payroll Tax Audits , Payroll Tax Problems , Tax Debt

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