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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?
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
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.
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.