Trust fund recovery program penalty abated, saving officer millions of dollars 

At the heart of our organization’s mission lies a commitment to advocacy. Every year, we help thousands of individuals and tax professionals navigate the complex landscape of federal taxes with confidence and clarity. This story is just one of many examples of how the Taxpayer Advocate Service (TAS) helps resolve taxpayer issues. All personal details have been removed to protect the privacy of the taxpayer.

Background on Trust Fund taxes

Trust fund taxes are income taxes, Social Security taxes, and Medicare taxes withheld from the wages of employees. They are called trust fund taxes because they are held in trust until they are paid by the employer via federal tax deposits (FTDs). If trust fund taxes cannot be collected from the business, the IRS may assert a trust fund recovery penalty (TFRP) against any person who is responsible for collecting or paying withheld income and employment taxes and willfully fails to collect or pay them.

Section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employers to defer the deposit and payment of the employer’s share of Social Security taxes during a deferral period that began on March 27, 2020, and ended on December 31, 2020.

Situation

An individual was an officer of a corporation and subsidiary corporation for several months, during which the corporation and its subsidiary made all required FTDs for the employee’s share of Social Security and Medicare taxes but chose to defer the employer’s share as allowed by § 2302 of the CARES Act. After the officer resigned, both companies failed to pay the employer’s portion of the trust fund taxes.

The IRS followed its normal process for applying the FTDs to the employer’s portion of the employment liability first. The former officer had no reason to believe a trust fund liability was accruing or that the corporation’s failure to pay the deferred liability after his departure would trigger a TFRP. The IRS assessed the TFRP for the corporation’s unpaid trust fund taxes against the former officer and proposed a TFRP penalty for the subsidiary’s trust fund liability. The officer appealed the proposed assessment.
IRS Counsel concluded that despite deferring the “employer portion of Social Security” as allowed by § 2302 of the CARES Act, the IRS was allowed to apply the timely FTDs in the best interest of the government.

TAS Advocacy

TAS helped the power of attorney for the corporation mentioned in this article to formulate a successful argument for the Appeals hearing. The corporate TFRP was abated and the proposed assessment was not asserted, saving the officer several million dollars and protecting his right to pay no more than the correct amount of tax.
TAS’s advocacy not only helped this taxpayer but may have a positive impact on similar cases in the future.

Today, tomorrow, and beyond, we remain steadfast in our dedication to making a difference – one taxpayer, one success story at a time. Read more TAS success stories.

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