Collection of IRS withholding taxes against business owners and managers

by Howard S. Levy, Esq. on April 24, 2009

in Employment taxes, Statute of limitations on collections, Trust fund recovery penalty

The IRS takes the decision to use employee tax withholdings to pay business operating expenses rather than the IRS quite seriously.  The owners and managers of the business who make these decisions will find the IRS coming not only to the business, but to them, to recover a portion of the withholdings.

This is an exception to the usual rule that the business debts of a corporation or limited liability company do not extend to its owners.  These actions in paying creditors, not the IRS, put the assets of the owners and managers at risk.  The IRS calls this a trust fund recovery penalty because the employee taxes should be held in trust by the business for payment to the IRS.

The IRS is aggressive in investigating and holding business owners and managers responsible for the repayment of these withholding taxes.

But it is important to understand this: the investigation and assessment of the business taxes against owners and managers is often the end of IRS activity against them.  Collection enforcement of a trust fund liability is often light after the fact, with little or no contact afterwards.

The IRS Taxpayer Advocate reported that the IRS collected 3% of the withholding taxes it assessed against business owners and managers in 2007. Consideration of the extent of IRS active enforcement is an important factor in determining the best way out for those that cannot personally repay these trust fund withholding taxes.  Sometimes it is best to know when – and how – to hold tight.

The IRS is aware of the problem, but it remains reality nonetheless. A request should always be made during an IRS withholding tax investigation for an upfront collectibility determination before these taxes are laid on those behind the business.  But note that these requests are rarely taken to heart by the IRS.

Without an upfront collectibility determination, these taxes are put on the books against those running the business, and the IRS then has 10 years to collect the taxes from them.  At this point, time is often the best healer for ownership and management. Time often works best for those that cannot repay as trust fund taxes are generally harder to compromise than a straight income tax liability and are not dischargeable in bankruptcy.

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