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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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corporation that is insolvent for the last many years and is

Customer Question

corporation that is insolvent for the last many years and is getting loans from unrelated third party to stay in business, fell behind in payroll taxes. service established a payment plan but did not advise client that can indicate Trust Fund Penalty on check since it appeared as if the entity would not survive. $26000 applied to interest penalty and employer taxes. so now the trust fund penalty is still $26000. isnt there any rules that the service has to allow or inform in such a case that this coding is permissible? for example there is the express installment method that i believe allows for trust fund portion payments recorded first on the company. need to see what i can argue on this individual's assessment, in light of all the past 5 years being losses, retained earning $500,000 deficit and the corp has $70000 receivables and $317000 in debt, nothing else. i feel there should have been assistance by the service to advise and allow these payments to first pay the trustfund
Submitted: 5 years ago.
Category: Tax
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

Can you clairify you information.

 

WE need to establish what you are referring to as a trust fund?

 

1. Is this the trust fund taxes which are public taxes considered to be trust fund? payroll taxes and sales tax?

 

2. If not number 1, then is this an irrevocable trust? Bankruptsy trust, etc?

 

Customer: replied 5 years ago.
sorry not to clear. there is no sales tax liability. by trust fund i am referring to the amounts withheld from the employees, which is also know as the 100%trust fund penalty when the debt shifts to the individual. when i handled such matters, i always had the client put on the corner, trust fund payment so that all the withheld taxes would be oovered first. i didn't handle this matter and now the payments have covered everything but that. i am trying to see if i have a viable arguement as to my the IRS needed to treat this differently knowing that they were insolvent and operating on loans.
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

The IRS does not often, if ever allow any relief from trust fund taxes, even in these circumstances.

 

Many failing businesses attempt to meet creditor obligations, even loans received to make payroll obligations, before making the trust fund payments. However the IRS considers this to be willful neglect to pay trust fund taxes. AND your client would still be subject to TFRP.

 

the penalty is equal to the tax due, so barring a successful appeal and request for abatement of the penalty, you would still owe the amount due if penalties were assessed.

 

If the business in now in failure you have two primary basis of argument.

 

1. Seek relief to the extent the individuals might not be considered responsible officers. Or

 

2. Seek relief of the penalties based on the insolvency of the business.

 

3. IN very rare situations, the IRS has given relief of the employer contribution, but that generally occurs connected to a bankruptcy proceeding. There is generally no abatement of requirement to pay moneys collected from employees or due to employees behalf.

 

This field agents guide to this matter is provided for your benefit: http://www.irs.gov/irm/part8/ch17s01.html

 

 

 

Customer: replied 5 years ago.
i have looked at the field agents guide and i have am also very aware of the trust fund rules to officers which we are not opposing. my point is that in that guide there are discussions which were not clear as to application which seem to indicate that installment payments can lst be applied to the trust fund portion under certain circumstances. i am trying to see if we fell under one of those rules and as such should have been given the knowledge that we can direct thepayments to trust fund first with the 14 installment payments. had that happened, right now there would be no portion to collect from the officer. the regular rules are something i know very well, it was intrepreting this guide that confused me. if you look for example at express installment payments, you see this same thing of trust fund first. i didn't know if the insolvency at time of evaluating how much a client can pay on installment allows and entitles the client to some benefit of how payments will be applied.
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

so If I understand correctly you are wanting to involvency allows or entilted your client to apply the payments how?

 

I guess I do not understand exactly what you are asking.

 

 

Customer: replied 5 years ago.
what i am trying to see is if the irs has a procedure that provides for application of all the installment payments first to the taxes withheold then employer tax and then interest and penalty because of the possible jeopardy of the entity's inability to pay because when an installment agreement is entered they look at the financial strenght and former tax years of the the client which would have easily shown anyone the high risk of the entity not being a going concern for long.

i guess i need someone that understands that policy document you refer to and is able to interepret my need versus instructions of the irs.
Expert:  Ed Johnson replied 5 years ago.

DearCustomer

 

I am familiar with the primary issues involving the trustfund taxes. The IRS ordering rules require that the trust fund taxes be paid first.

 

But with your permissino I will opt out to allow someone else an opportunity to comment.

Customer: replied 5 years ago.
thanks

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Ed Johnson
Ed Johnson
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GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee