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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10097
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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You have stated that a trustee who failed to pay withholding

Customer Question

You have stated that a trustee who failed to pay withholding for the beneficiary's employees is responsible for penalties and interest from the trustee's own personal funds, but does not have to pay the ACTUAL TAX from her own personal funds. The ACTUAL
TAX must be paid from the trust funds, not the trustee's own personal funds. What is the IR Code or Regulation that states this?
Submitted: 11 months ago.
Category: Tax
Expert:  Lane replied 11 months ago.

No, that's not exactly what I said ... You must separate the portion that is paid from employee withholding and the portion that the Entity should have matched.

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IRS, Sec. 6672(a) imposes a penalty on any person who is responsible for paying payroll taxes and willfully fails to do so. This is known as the trust fund recovery penalty (TFRP). Typically, the TFRP equals the amount of money the employer withheld from employees’ wages (e.g., Social Security, Medicare, and income taxes) that was not remitted to the IRS.

Expert:  Lane replied 11 months ago.

So the actual tax must be separated into it's components to understand how things work.

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If monies were NOT withheld then the responsible person will owe that portion (which is the IRC § 6672 penalty) and interest .. but the entity itself should have paid the matching component.

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Customer: replied 11 months ago.
the entity itself should have paid the matching component. Agreed. Now give me an IR Code or IR Reg that states this.
Expert:  Lane replied 11 months ago.

IRC § 6672 ... there IS no reg that states that the trustee has to pay from personal funds ... the reg states that the penalty amount IS what was withheld ... If those dollars were actually withheld then they will be there in the entity to use

Expert:  Lane replied 11 months ago.

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Customer: replied 11 months ago.
The "entity" in this case is the trust itself, not the trustee. So the tax has to be paid from the trust funds, NOT the trustee's own personal funds, although she is responsible for penalties and interest from her own personal funds.
What is the
IR Code or IR Reg that states this ?
Expert:  Lane replied 11 months ago.

The goal here is for IRS to be able to collect ... There IS no such regulation that assigns WHERE the dollars physically come from ... they assign personal responsibility to the amount withheld because of the constructive trust (not the entity here but another virtual/constructive trust that's created when employe dollars are withheld and not paid in) that is created by virtue of the withholding.

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IRS does not care whether the funds are paid from the entity's funds or not. They just want to collect what was withheld.

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If funds still exist within the entity (corporation, trust, etc) then they can be paid from those dollars as was the intention

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But what happens many times (and this is the reason for making this a personal liability, the owner, payroll person, trustee, whomever withheld and then used the dollars for something else.

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Whether the responsible person pays (1) out of pocket because they absconded or paid other entity liabilities with the funds or (2) from the funds that WERE withheld is not the issue

Expert:  Lane replied 11 months ago.

The law that exists regarding withholding from an employee's compensation and paying an employer's contribution for Social Security and Medicare taxes come from the Federal Insurance Contributions Act (FICA).

Expert:  Lane replied 11 months ago.

So, to recap ... § 6672 makes the responsible person liable but does NOT state where the monies are collected from ... If funds were withheld, then that same responsible person will use those dollars withheld to pay the penalty (which again IS the withholding amount) regardless of where she comes up with the money ... There is No rule around paying from personal funds.

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§ 6672 simply makes the amount withheld the RESPONSIBILITY of the responsible person, in an effort to collect.... If the dollars were actually withheld, and deposited to the trusts' account, then she will get them from that account.

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If she did not, she will have to pay personally, or find other trust fund assets to use that may have been created by virtue of whatever WAS done with the withholding - because the dollars were used for other purposes. If she bought stock with the funds, the stock could be sold to pay the withholding.

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The differentiation between whether the responsible person pays from personal funds or not will be derived from the facts and circumstances of the case.

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The fiduciary duty to beneficiaries to provide an accounting is where the answer to your question bubbles to the top.

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If its ascertained by beneficiaries that the fiduciary either personally benefited or otherwise acted NOT in the beneficiaries best interest under the terms of the trust, there would be legal recourse to be sure that the trustee makes the beneficiaries (through the trust) whole.

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IRS just wants the withholding to be paid, and they will hold the trustee responsible if it's not.

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Hope that helps to clarify

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I tried to accept your phone call request but the system returned an error that there was a problem with your payment.

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I HAVE made an offer from my end, sometimes that rectifies the problem ... seems to be a systems issue.

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Feel free to accept and we can talk this through if you'd like

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Lane

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If this HAS helped, and you don't have additional questions on this, I'd appreciate a positive rating (by clicking the stars on your screen) ... that's the only way I'll be credited with a portion of what you've paid JustAnswer.
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Thank you,

Lane

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