Unpaid payroll taxes are an issue that the IRS takes incredibly seriously. They take it so seriously that if your business never remits these collected taxes to the IRS, they take steps to hold responsible parties personally liable for the Trust Fund Recovery Penalty (TFRP). The TFRP is 100% of the withheld taxes that weren’t paid.
However, the IRS will only assess the penalty against those who were both responsible for the tax payments and willful in not making those payments. Of course, this leads to the question: Does the IRS consider me willful when it comes to payroll tax non-payment?
You’re not automatically in trouble if unpaid payroll taxes have caught the IRS’s attention and you have received IRS Letter 1153, but it’s important not to assume you’re off the hook, either. Learn more about the role of responsibility, the role of intent, and what to do if the IRS is investigating you. If you’re afraid that the IRS is going to pin the TFRP on you, let’s talk. Call McLaud Law P.C. at 585-397-7785 to schedule a consultation now.
Key Takeaways
- When it comes to the TFRP, willfulness doesn’t mean malicious intent. It just means you should have known that taxes were due and unpaid.
- The IRS can use many types of evidence to prove willfulness, including meeting minutes, bank records, and private communications.
- Working with a tax attorney is crucial if you want to protect yourself from personal liability.
What Willful Means in TFRP Cases
The IRS’s definition of willfulness is often much broader than people think, leading some to wrongfully believe that they are in the clear when it comes to certain penalties. Willfulness when it comes to the Trust Fund Recovery Penalty just means that the taxpayer made the intentional, voluntary decision not to remit the payroll taxes owed to the government.
Whether they simply left the money in the account or used the funds to cover other business expenses doesn’t really matter, nor does what other expenses were paid instead; what matters is that they were responsible (had the ability and obligation to pay the tax) and did not do so, for whatever reason.
Willful doesn’t necessarily mean that you intended to deprive the IRS of money owed to them. It simply means that you willfully did not pay the taxes or had a reckless disregard for whether or not they were paid. You don’t need to have stolen the funds, aimed to defraud the government, or used the funds for your own gain. Even the common stance of “we planned on catching up later” can be proof of willfulness if you paid other bills before your tax bill.
Examples of Willful Conduct
Breaking down common tax behaviors into willful conduct, not willful conduct, and conduct that may fall into either category can make it easier to understand how much risk you’re facing. Examples of willful conduct that may lead to the TFRP include:
- Signed checks to vendors, landlords, and employees while knowing that payroll taxes were unpaid
- Ignored or disposed of IRS notices while continuing to spend from business accounts
- Deferred taxes intentionally to cover other businesses expenses that you considered “more urgent”
- Delegated tax duties to other staff members but saw red flags that they were going unpaid and failed to intervene
Even temporarily putting off payroll taxes may be willful behavior in the eyes of an IRS auditor or Revenue Officer.
Situations That Often Do Not Count as Willful
Lack of intent is a huge part of avoiding the TFRP. Conduct that the IRS generally does not view as willful includes:
- Had no knowledge of the tax debt and no reason to believe that it was unpaid
- Did not have access to company finances and accounts
- Had no authority to decide which bills did or did not get paid
- Was intentionally misled by another officer, executive, or bookkeeper
- Was intentionally excluded from financial decision-making
Financial hardship isn’t necessarily a defense in this situation, but not knowing about the tax debt (and having no reason to suspect it) can be.
Gray Areas
There are also tax situations that can prove or disprove willful conduct, depending on how they are presented and how the IRS interprets them. Consider these common examples:
- Accountant handles payroll: IRS may claim that you still should have seen notices regarding unpaid payroll taxes coming in.
- Didn’t sign checks: Even if you weren’t the person signing the checks, you may be considered responsible if you approved spending and had financial control in the business.
- Intended to make up the difference later: The IRS may point to this as proof that you gave preference to other creditors.
Evidence Used to Prove Willfulness
The IRS goes to great lengths to make strong cases against responsible parties in TFRP cases. All they need is evidence that you knew of the debt, should have known of the debt, or actively chose not to pay it. They may use canceled checks, emails or texts referencing IRS notices, IRS payment plans that you defaulted on, board minutes, internal discussions, and proof of payments towards other expenses to highlight your willfulness.
They also have access to your IRS.gov login history, which would prove that you knew of the outstanding debt. They don’t have to prove that you had malicious intent or never intended to pay the government—just that you did not pay the government and used the money in other ways.
How to Rebut Willfulness Findings
Even if the IRS has evidence it can use to prove that you were willful in your failure to pay payroll tax, that doesn’t mean that the case against you is done. You can still defend yourself, but having a tax attorney is crucial at this step. If they have evidence that works in their favor, you are very close to a TFRP assessment, and handling your own legal defense is incredibly risky.
There are different defense options you may explore during this time. Options include showing that:
- You did not have financial authority or control
- You had no access to accounts or records
- You took steps to pay the payroll tax debt once you knew of it
- You attempted to pay it but another officer overrode your decision
- The delinquency occurred at a time when you were not a responsible party
- You had no payroll or tax roles when the debt was accrued
Plan on providing evidence for anything you claim, such as proof of changed passwords on bank accounts, emails showing that your financial decision-making authority was taken from you, or intentional steps taken by others to hide the tax debt.
The Form 4180 Interview
IRS Form 4180 interviews are used to determine who could be a responsible party and whether or not those responsible parties were willful in their failure to pay. Many decisions regarding willfulness come directly from these interviews, and unfortunately, these issues occur because people are trying to cooperate with the IRS and be helpful. By answering honestly and trying to be flexible, they unintentionally incriminate themselves.
You should be represented by a tax defense lawyer before you ever sit down for a 4180 interview. By being proactive about the interview, you can protect yourself from making damaging admissions.
The Importance of Legal Representation
A wide range of tax issues benefit from legal representation, but few are quite as urgent as the Trust Fund Recovery Penalty. This is a situation where you should talk to an attorney the moment you recognize that the IRS is considering you as a potential responsible party. If the IRS assesses the TFRP against you, you are personally liable for that amount. Should you fail to pay, they can take any collection actions against you that they wish. That may include placing a lien on your assets, levying your wages and bank accounts, and even revoking your passport.
Getting a lawyer involved early can help you distance yourself from the investigation, provide ample proof that you had no role in tax payments or responsibility, and protect yourself from personal liability. The sooner you reach out to us at McLaud Law P.C., the more options we have in building your defense. Set up a consultation now by calling us at 585-397-7785 or reaching out to us online.
Frequently Asked Questions
I was an officer when payroll taxes went unpaid. Am I automatically responsible?
No. The IRS will investigate a range of potential responsible parties, and they have to prove willfulness to prove that someone is a responsible party.
What if I was not the one who filed or paid taxes?
You could still be considered a responsible party if you had decision-making authority and should have noticed warning signs. One business can have multiple responsible parties.
How can I protect myself from personal liability?
You have to prove that you were not a responsible party in terms of tax returns and payments. Working with a tax attorney can help you protect yourself from personal liability.
What if I unintentionally say something that incriminates me?
Once you’ve told the IRS something, it is impossible to take it back. Be proactive about your defense by talking to a lawyer before you speak to the IRS directly.
This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.
Sources:
https://www.irs.gov/irm/part5/irm_05-007-003r#idm139898480689760
https://www.irs.gov/individuals/international-taxpayers/trust-fund-recovery-penalty
https://www.irs.gov/irm/part5/irm_05-019-014r
https://www.irs.gov/irm/part8/irm_08-025-001
