Defending Yourself Against the Trust Fund Recovery Penalty or Order Assessing Personal Liability

In both good and bad economic climates, any business can face cash flow problems. Sometimes, a business finds itself in a situation where there is not enough money to pay all of its obligations, including the employment taxes to the IRS and the employment and sales taxes to the Minnesota Department of Revenue (MDR). If these obligations remain unpaid, the IRS or the MDR may pursue the individuals in the company who they perceive to have been the decision makers, the ones who decided not to pay the taxes. They will hold these individuals personally responsible for all or a portion of the unpaid tax liability.

You may be one of the individuals the IRS or the MDR believes controlled the company’s finances and have received a notice assessing you the Trust Fund Recovery Penalty (IRS) or Personal Liability (Minnesota Department of Revenue). Do not let these notices go uncontested. A notice assessing you for your company’s unpaid employment or sales taxes is not the final determination. Both the IRS and the MDR allow you time and a procedure to contest such an assessment.

If you have received a notice from the IRS assessing you the Trust Fund Recovery Penalty or an Order Assessing Personal Liability from the MDR, make sure you file an appeal within the time allowed. You may not be responsible for these taxes. The fact that you received a notice of the assessment usually only means that you possess some of the common characteristics of the individual who can be held responsible for a company’s unpaid employment or sales taxes. You may be an officer, a bookkeeper, a check signer, or a shareholder. While each of these positions is relevant to determining whether you are responsible, they do not, standing alone, support an assessment against you. The key is whether you had real control over the company’s finances and the payment of creditors, and in the case of the IRS, did you know the taxes were not being paid?

You should also ask to see all of the information the IRS or the MDR used to make their determinations that you are responsible. For the IRS, you should submit a Freedom of Information Act (FOIA) request to obtain this information. For the MDR, you can request these documents under the Government Data Practices Act (GDPA). You want this information so you can determine if the IRS or the MDR is making this assessment on incorrect or misleading information. Mistakes are not uncommon.

The centerpiece of the IRS investigation is the Form 4180. The IRS uses this form to interview potential responsible parties and others who had knowledge of the company’s operations. The information in these forms will show you why the IRS believes you are responsible. The IRS will also have collected corporate and banking records which they will use to determine who in the business had authority to and actually did handle the financial matters for the company. The MDR collects similar information.

The key to properly defending yourself against improper assessments for unpaid corporate employment and sales tax obligations is to have the information the IRS or the MDR used to make its determination.