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Bookkeeper Hit Hard by Trust Fund Penalty

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The trust fund penalty, sometimes called the 100% penalty, is one of the most onerous federal tax law provisions on the books. Even worse, the IRS and the courts typically don’t grant much leniency to taxpayers.

Mar 28th 2022
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In a new Tax Court case, Kazmi, TC Memo 2022-13, 3/1/22, a harsh tax penalty was imposed on a part-time bookkeeper that was paid at an hourly rate.

Background: As some of you may know, of payroll taxes aren’t remitted to the IRS in time, an individual determined to be a “responsible party” may be held personally liable for the entire amount of the unpaid taxes. In other words, a company owner might have to pay the IRS an amount equal to 100% of the shortfall out of their own pocket.

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But this provision isn’t limited to just business owners or corporate officers. It can be extended to anyone in the company who is responsible for collecting or paying payroll taxes and willfully fails to do so. What’s more, the IRS takes a broad view of what constitutes a willful failure for this purpose.

Facts of the new case: The taxpayer was employed by Urgent Care as a part-time bookkeeper and paid an hourly rate during the tax year in question. He had no ownership interest in Urgent Care nor was he an officer. His name was not on any of Urgent Care’s bank accounts.

Furthermore, the taxpayer didn’t have check signing authority for Urgent Care or any authority to make payments on its behalf. At all times, he worked under the direction of his immediate supervisor, a physician.

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Seth F
By Seth Fineberg
Mar 29th 2022 12:15 EDT

This comment in from Peggy Burns, EA:

Mr. Berry ends his article, with the results being, "Result: After examining all the facts, the Tax Court concluded that the taxpayer was a responsible party under the law and that the failure to remit payroll taxes on time was willful. Despite procedural issues raised by the taxpayer, the Court said that the IRS collections settlement officer acted within their purview. So it upheld the penalty assessed against this part-time worker.

The main takeaway from this case is that the trust fund penalty isn’t restricted to just corporate bigwigs. It can trickle down to employees in lower-level jobs and even part-timers or seasonal workers if they assume responsibility for payroll matters. In short, being forewarned is being forearmed!", but the actual court case had nothing to do with the TFRP being assessed correctly or incorrectly! It is based on the facts that the Bookkeeper did not exhaust his appeal rights when the 1153 letter was sent to him, which gave him statutory rights to appeal the proposed civil penalty, and instead, waited to bring the validity to the IRC 6672, in a CDP Appeal for a Collection Alternative. At that time it is not the validity of the assessment that can be brought up, but the way in which they will pay it. Once the SO closed the case and issued the Outcome of the hearing, as sustained levy action, he filed a Tax Court Petition, thinking he would be able to argue the assessment in TC. However, a TC Petition on a CDP Determination is only for abuse of discretion of the SO, or because they did not follow policy and procedure. In this case the TC held that the SO did follow all policies and procedures and did not abuse discretion. The main takeaway from this and result, is "If you do not believe you should be held willful and responsible under IRC 6672, then make sure that once you receive your 1153, Proposal of TFRP Letter, than you need to file an appeal within the 60 day timeframe as you cannot argue later in a CDP or TC Petition".

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By David Woods
Mar 29th 2022 14:36 EDT

"After examining all the facts, the Tax Court concluded that the taxpayer was a responsible party under the law and that the failure to remit payroll taxes on time was willful."

It did no such thing. Tax Court does not have jurisdiction on trust fund penalties. It literally said so in the decision. As Peggy Burns notes below, the issue before the court was whether the IRS Settlement Officer at the CDP hearing abused their discretion in determining that the IRS debt was valid. Even at the CDP hearing the penalty couldn't be challenged because the taxpayer had been given the right to appeal that penalty and didn't.

Saying that the Court upheld the penalty is disingenuous at best.

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