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Stimulus Check: When Is The Deadline To Claim?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) authorized the IRS to issue Economic Impact Payments (aka stimulus payment/check) of up to $1,200 to most U.S. citizens and residents.  However, time is running out to claim those funds.  Here, we discuss what you need to know.

Who is eligible for a stimulus payment under the CARES Act?

You’re likely eligible for a stimulus payment if you:

  1. are a U.S. citizen or resident alien
  2. have a work-eligible Social Security number, and
  3. can’t be claimed as a dependent on someone else’s tax return.

How large is the stimulus payment?
The CARES Act authorized payments of up to $1,200 to eligible individuals plus $500 per qualifying child, and up to $2,400 to married couples who file a joint return plus $500 per qualifying child.

What are the deadlines to claim your stimulus payment?
The answer to that question depends on if you were required to file a return or not.  Generally, those who meet the requirements below would NOT have been required to file a return:

  • Your income is less than $12,200
  • You’re married filing jointly and together your income is less than $24,400
  • You have no income

If you were not required to file a 2019 federal income tax return, the best and fastest way to claim your stimulus payment is to visit the IRS EIP page by October 15th 2020, and click “Non-Filers: Enter Payment Info Here.” If you provide bank account information, the IRS will deposit a payment directly into your account. If you don’t provide bank account information, they’ll mail you a check.

If you were required to file a 2019 federal income tax return, the best and fastest way to claim your stimulus payment is to electronically file your 2019 tax return immediately. If you already filed a 2019 tax return, you can check the status of your stimulus payment by visiting the same IRS EIP page provided above and clicking “Get My Payment.”

After October 15th 2020, the only way to claim your stimulus payment will be to file a federal income tax return. If you do not file a 2019 tax return in 2020, you may instead be able to claim a recovery rebate credit when you file your 2020 federal income tax return in 2021.

Best Time To File Old Taxes? NOW!

Believe it or not, the percentage of the taxpaying population who files late or doesn’t file at all is substantial.  There have been several statistics that indicate that eleven to fourteen million taxpayers fail to file their returns on time.  This could mean they do it months, if not years after the April 15th deadline.  The reasons for filing late are all across the board.  They range from forgetfulness and confusion on what to do to, all the way up to not sure how to pay a balance, to destruction of records.  No matter what the reason, we’re going to discuss why now (through say 2021) is the best time to file those old tax returns you’ve been putting off.

Covid-19 has slowed down IRS operations and processing times.  When the Internal Revenue Service (IRS) machine is humming along in a “normal” year, its computers are busy spitting out letters to taxpayers, and its personnel attempt to collect tax debt from delinquent taxpayers.  This includes audits, site visits, revenue officer contact and a host of other things.  The IRS is not “fast” in the best of times and now, due to Covid-19, their operations are severely impacted.  For example, from March through July 2020, the IRS computers were offline and NO mail sent to the IRS was opened.  All of the above can give you “more” time to address your situation.  Meaning, it can give you time to:

  • Get the documents needed to have the old tax returns prepared.
  • Allow you to prepare all the returns at once for submission.
  • Determine if (or how much) you owe the IRS and come up with a game plan to deal with it.
  • Mail or electronically file the returns with the IRS and then wait for them to catch up and respond.

If you only filed a 2018/2019 tax return for a stimulus check, but have other unfiled returns, you just put yourself back on the IRS’ radar.  Those who filed tax returns but have other unfiled tax returns, just “raised their hand” so-to-speak with the IRS.  Essentially, that person has now told the IRS 1) that they are still around and 2) where to send the letter asking about those other unfiled years.  It’s only going to be a matter of time before they reach out to you about those missing returns.  Best to use this time to perform the steps outlined in the bullet points above!

If you owe the IRS, the sooner you file, the sooner the 10 year clock for them to collect starts running.  Many taxpayers, and some practitioners, are unaware that the IRS by law only has 10 years’ time to collect a tax debt. This is referred to as the statute of limitations or in IRS speak, the Collection Statute Expiration Date or CSED for short. The 10-year period begins to run with the date of the “assessment” of the tax, not the tax year for which taxes are due. For example, if a return for 2017 is not filed until 2020 and the tax is assessed in 2020, the 10-year period begins to run in 2020 and expires in 2030.

If you’re not working or have a reduced income due to Covid-19, it could result in a “deal” with regards to your tax debt.  When it comes to settling ones tax debt, it all comes down to the IRS term referred to as reasonable collection potential or RCP.  The RCP is how the IRS measures the taxpayer’s ability to pay on the taxes they owe.  It includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.  It is the last point that can get you a deal during these “unprecedented times” we will be facing until about 2021.

You see, if you have no assets and your income is reduced, your RCP could be $0 or even negative once the IRS factors in those allowable expenses.  If your RCP is in fact $0, then that means that you won’t have to pay them anything (at the moment).  Why?  Because the IRS will place your account into Currently Not Collectible (CNC) status.  But what is also good about not having income coming in at this time is that you may be able to settle all your tax debt via an Offer In Compromise (OIC).  The OIC program allows eligible tax debtors to pay the IRS an amount of money that is less than what they owe in order to wipe out their entire tax liability.

Now is the perfect time to “reset” your life and taxes.  Covid-19 will force some people to hit “rock bottom” so to speak.  But this is the best time to reset your life, get rid of the past and move forward.  Why?

  • When you hit rock bottom, you let go of everything. You start again with nothing and get rid of all the stuff in your life that doesn’t make sense.
  • Pain is the momentum and the motivation you’ve probably needed to make you actually deal with your tax situation once and for all.
  • Rock bottom is where your gratitude increases ten times, if not more. That’s because life is a battle and it’s not easy.  It’s not meant to be a walk in the park, but it can be so much better when you appreciate all that is around you.

Need help filing those old tax returns?  Why not make today the day you FINALLY deal with those old tax returns?  Why not take the first step to getting that IRS monkey off your back?  Take the first step RIGHT NOW and call our office or shoot us an email via the signature in our footer.  We can help you get any missing documents, file your returns and even deal with the IRS debt should you owe back taxes.  Trust us, you’ll feel much better once you put this behind you!

IRS CSEDs Are Sometimes Inaccurate

 

The Collection Statute Expiration Date (CSED) ends the Government’s right to pursue collection of a tax liability.  This date is generally 10 years from the date the tax was assessed.  However, some situations require the CSED to be recalculated.  In a 2013 audit by the Treasury Inspector General for Tax Administration (TIGTA), it was determined that the CSED was not always recalculated accurately.  An inaccurately calculated CSED could result in unlawful collection activity by the IRS and violate a taxpayer’s rights.  Conversely, the IRS could potentially lose revenue if an inaccurate CSED appears to have expired when the debt is still collectible.

Why TIGTA Did The Audit?

Over the years, the IRS has taken steps in an attempt to improve CSED accuracy. However, the National Taxpayer Advocate has reported miscalculated CSEDs as one of the most serious problems encountered by taxpayers. TIGTA’s audit was initiated to determine whether CSED recalculations were properly and accurately completed to effectively protect taxpayers’ rights and the Government’s interest.

What The Report Found.

TIGTA did a statistical sample of 75 tax modules from a population of 1,085 with manually recalculated CSEDs.  What they found was that 29 of the 75 tax modules, or roughly 40%, contained errors.  Their specific findings were:

  • Twenty-one had inaccurate CSEDs and eight were missing the required documentation to support the CSEDs.

  • Based on the results of their case review, it was estimated that CSEDs for 260 tax modules were extended longer than they should have been, 43 tax modules were not extended as long as they should have been, and 116 tax modules were unverifiable.

  • Most errors were made by employees.  Managerial approval is required when CSEDs are extended or updated for any reason.  However, the IRS internal controls requiring managerial approval were not always effective in ensuring the accuracy of manually recalculated CSEDs.

  • An IRS computer system recalculates most CSEDs systemically.  Random samples from eight separate activities that trigger systemic CSED recalculations showed that all CSEDs were accurate for six of the eight activities.  However, the CSED recalculations were not always accurate for modules involving bankruptcies or estates.

  • TIGTA also identified nine taxpayers who received an annual balance due reminder notice after the CSED expired.

What does this all mean?

If you have IRS debt that you believe has expired, but you are still receiving notices about it, then it could mean one of two things:

  1. Your CSED was inaccurately calculated
  2. There were actions taken on your account that stopped or “tolled” the CSED.

This post discusses what tolls the CSED and for how long.  If you are looking for how to calculate or recalculate your CSED, we recommend this post from our sister site.  It talks about how we offer a service, for a nominal price, where your CSED can be calculated so you know approximately when your CSED will expire.

Deadline Extended to Claim Refunds for 2016 Tax Returns

Time is running out to file your 2016 tax return!

If you did not file a tax return for 2016, you may be one of over 1 million taxpayers who may be due a refund from that year.  The deadline for you to claim a refund, on a tax return in which one was owed to you, is 3 years from its due date (excluding extensions).  For example, if you were due a refund on your 2016 Income Tax Return (which was due April 15th 2017), you would have until April 15th 2020 to claim it.  If you don’t file a claim for a refund within three years, the money becomes property of the U.S. Treasury!

Due to the Covid-19 pandemic, the IRS has extended the time to claim refunds related to 2016 until July 15th 2020.

Note, there is no interest or penalty for failing to file a return in which a refund was owed.  However, if you have a balance due, those items can be pretty stiff as outlined in this post.

Here are some of the facts you need to know about 2016 unclaimed refunds:

  • The unclaimed refunds apply to those who didn’t file a federal income tax return for 2016.
  • Some people, such as students, part-time workers or seasonal employees may not have filed because they thought they had too little income to require filing a tax return. However, if you did not have a filing requirement, you may still have a refund waiting if you had taxes withheld from your wages.  A refund could also apply if a taxpayer qualified for certain tax credits, such as the Earned Income Tax Credit.
  • The law requires that you properly address, mail and postmark your tax return by July 15th 2016 to claim your refund.  2016 returns CAN NOT be e-filed as they are not one of the 3 active years currently supported by the IRS Modernized E-File (MEF) system.
  • The IRS may hold your 2016 refund if you have not filed tax returns for 2017 and 2018. The U.S. Treasury will apply the refund to any federal or state tax you owe. It also may use your refund to offset unpaid child support or past due federal debts such as student loans.
  • If you’re missing Forms W-2, 1098, 1099 or 5498 for 2016, you should ask for copies from your employer, bank or other payer. If you can’t get copies, get a free transcript showing that information by going to IRS.gov. You can also file Form 4506-T to get a transcript.

Need help filing that 2016 tax return?  Give us a call or visit the main page of our site and shoot us an email via the address in the footer.  We have the software to file tax returns going all the way back to 2002 so we’re sure we can help you out with 2016!

How To Fill Out IRS Form W-9

A W-9 is used to confirm a person’s name, address, and taxpayer identification number (TIN) for employment or other income-generating purposes

 

IRS Form W-9 is officially titled the Request for Taxpayer Identification Number and Certification.  This form is used to provide the correct Taxpayer Identification Number (TIN) to a person (or company) that is required to file an information return with the IRS.  This information return (e.g. Form 1099-MISC, Form 1098) is to report, for example:

  • Non-employee compensation;
  • real estate transactions;
  • mortgage interest;
  • acquisition or abandonment of secured property;
  • cancellation of debt;
  • and contributions to an IRA.

Now let’s look at the exact steps to correctly complete a Form W-9.

Line 1 of the form asks for your name. If you’re running a sole proprietorship you would enter YOUR name.  To clarify this point, the name on line 1 must match with the name the IRS associates with your TIN (i.e SSN or EIN).  The name on line 1 should never be a disregarded entity – a single owner LLC.

If you have a business name, trade name, doing business as name or disregarded entity name you can enter it on line 2 business name.

On line 3, select just ONE box. Check the appropriate box for the U.S. federal tax classification of the person whose name is entered on line 1.  For example, let’s say that Jared Rogers is the name on line 1.  However, Jared owns and does business as Jared’s Dirty Little Secret LLC.  Since the LLC is owned only by Jared, he would check the “Individual/sole proprietor or single-member LLC” box on line 3.  By contrast, of the LLC was owned by 2 people, then the would check the “Limited liability company” box and enter in P (for Partnership) in the box to the right.

Line 4 is for exemption codes. Exemption codes are for those payments that are exempt from backup withholding.  Usually, individuals aren’t exempt from backup withholding. Corporations are exempt from backup withholding for certain payments.  Refer to the instructions provided with Form W-9 for the appropriate code to use if you believe your business is exempt from potential backup withholding.

In line 5, enter your address. If you have already provided the requester an address and this is a new address write “new” at the top.  If you discover that the requester has been using the wrong address or TIN for your business, let the requester know as soon as possible and provide the correct information.

Enter your city, state and zip in line 6.  Line 7 is optional. Some businesses have multiple accounts with a vendor and this line is available to specify which account this W-9   pertains to.

You’ll complete Part I next. Enter your SSN, EIN or individual taxpayer identification as appropriate.   If you’re asked to complete Form W-9 but don’t have a TIN, apply for one and write “Applied For” in the space for the TIN, sign and date the form, and give it to the requester.  Requestors of Form W-9 will have to deduct backup withholding from any payments that are subject to it until you provide your TIN.

Next, you’ll complete Part II. This is where you sign when required.  Form W-9 is officially titled Request for Taxpayer Identification Number and Certification. By signing it you attest that:

  • The TIN you gave is correct. This can be a Social Security number or the employer identification number (EIN) for a business.
  • The taxpayer (you, the payee) isn’t subject to backup withholding.
  • You’re a U.S. citizen or other U.S. person.
  • Any FATCA (Foreign Account Tax Compliance Act) codes on the form are correct. FATCA reports are required of U.S. citizens to report foreign financial assets held outside the U.S. ​
  • If you’re a recipient of payments that are reported in Box 5 or Box 7 for nonemployee compensation on Form 1099-MISC you must give your correct TIN. You must sign the certification if you’ve been notified that the previously provided TIN is incorrect, or there is a problem with the information provided to the IRS at an earlier date.

Although Form W-9 is a standard tax document and by itself, it doesn’t pose many problems, there are a few situations worth watching for.

  • Make sure a person knowledgeable about your business is filling out the form.
  • If you’re starting a new job and your employer hands you a W-9, ask if you’ll be working as a self-employed independent contractor or as an employee. Employees complete Forms W-4, not Forms W-9, to set their tax withholdings.
  • Make sure you understand and agree with the worker classification the requestor has in mind.
  • If you’re unsure why you’re being asked to complete the form, ask what types of tax documents you can expect to receive when the information is used. Form 1099-Miscellaneous, for example or Form 1099-DIV.
  • Make sure the person taking your information is authorized to do so.

You should always exercise caution when giving out sensitive information like your name, address, SSN or EIN so take steps to transmit W-9 information securely.  Protect the confidential information by sending it via an encrypted email, by hand delivery, or by mail.

You might have other questions as you complete a Form W-9.  With that said, it’s advisable to download the instructions and review them prior to completing and submitting the form to the requestor.

The 2019 Illinois Tax Amnesty Program

Do you owe unpaid taxes to the State of Illinois? Well, we have good news for you. If you file any of those unfiled returns AND pay the liability owed, the State will FORGIVE any associated penalties and interest!

So what should you know about the program? Read on.

What tax liabilities and periods are eligible for the 2019 Illinois Tax Amnesty program?
Eligible liabilities are taxes due from periods ending after June 30, 2011, and prior to July 1, 2018.

What is the benefit of participating in the amnesty program?
If an eligible tax liability is paid in full between October 1, 2019, and November 15, 2019, eligible penalties and interest will be waived.

How do you participate?
If you have an existing tax liability, simply make full payments of your eligible tax liability between October 1, 2019, and November 15, 2019. If you failed to file a tax return or incorrectly reported the liability due on a previously filed return for these tax periods, now is the time to file the returns, make corrections, and pay the tax. You must file an original return for non-filed periods or file an amended return to make corrections.

What if you owe only penalty and interest?
If you owe only penalty and interest, you do not qualify for the amnesty program.

How do you ensure your payment is applied to the correct tax period?
The Illinois Department of Revenue encourages taxpayers to make separate payments for each tax liability they’re paying. However, if a taxpayer chooses to make one combined payment, they must clearly identify each eligible tax liability being paid by tax type, tax period, and amount. If they do not specify where the payment should be directed, their payment may be applied according to IDOR’s usual regulations and procedures, which may result in the payment being applied to periods that are not eligible for amnesty.

How do you make payment?
A taxpayer can make their payment via mail, check, in person or via My Tax Illinois. To read all the details on how to send payment, as well as get complete details about the program, visit this post on the IDOR website.

What if my liability has been referred to a collection agency??
If your account has been referred to a private collection agency, do not make your payment directly to IDOR. You must make your payment through the private collection agency. Contact the collection agency for your total amount of eligible amnesty debt or follow the directions you receive on the amnesty letter sent to you by the private collection agency.

Understanding IRS CSED Tolling Events

Many who owe taxes know that the IRS can not collect on a tax debt forever. Each tax assessment has what is known as a Collection Statute Expiration Date (CSED). Internal Revenue Code (IRC) section 6502 provides that the length of the period for collection after assessment of a tax liability is 10 years. Once the CSED has been reached, it ends the government’s right to pursue collection of a liability.

Items that stop the 10 year clock. What is important to understand is that while the normal time to collect is 10 years, various circumstance may “extend” the CSED. What these circumstances essentially do is push the CSED date forward in time. The IRC speaks to “suspension” of the period of limitations, during which the CSED “clock” stops running. Such suspension periods lead to the extension of the CSED.

So what actions stop the clock and for how long? The most encountered suspension (or tolling) events often include:

  1. Bankruptcy: CSED is tolled from the date of filing the petition until the date of discharge, plus 6 months. IRC § 6503(h)(2).
  2. Pending Installment Agreement: CSED is tolled from the date of the request for an installment agreement, plus appeals, plus 30 days. IRC § 6331(k)(2) and 6631(k)(3).
  3. Termination of Installment Agreement: CSED is tolled 30 days from the date of termination, plus appeals. IRC § 6331(k)(3).
  4. Pending Offer in Compromise: CSED is tolled from the date of acceptance for processing of the OIC plus appeals after rejection, plus 30 days. IRC § 6331(k)(3).
  5. CDP Hearings: CSED is tolled from the date of a timely request until final disposition. Additionally, if it is less than 90 days from the CSED, the CSED is reset to 90 days from the date of final disposition. Reg. § 301.6330-1(g)(3).
  6. Military-related Service in a Combat Zone: CSED is tolled the length of service, plus 180 days. IRC § 7508(a)(1)(i).

What does this look like in reality?

To help one understand how this may look when they analyze an IRS Account Transcript, we’ll review a few examples.

Let’s say a 2018 tax return is filed on the due date of 4/15/19. The tax assessed on 4/15/19 ordinarily has a CSED of 4/15/29. The taxpayer request an installment agreement that is reviewed from 8/1/19 until 9/1/19. This will toll the CSED for 30 days for the review and another 30 days post review (or 60 days total). As such, the new CSED will be 6/15/29. Easy enough right?

In a more involved example, let’s say a taxpayer files their 2017 tax return on 4/15/18, reflecting a tax liability of $11,906. The normal CSED would be 4/15/28. The taxpayer then files a bankruptcy petition on 5/15/18, and receives a Chapter 7 discharge on 8/15/18. The CSED is suspended for the period of the bankruptcy (92 days) plus six months. Accordingly, the new CSED is 1/12/29. Still fairly straightforward.

Where things often get confusing (for taxpayers as well as for IRS employees calculating the CSED) is when there is an intersection of suspension events. What is important for the taxpayer (as well as the IRS employee calculating the CSED) to know is that more than one case action can suspend the running of the collection statute at the same time. Overlapping suspensions run concurrently; they are not cumulative.

To illustrate this, let’s look at one last example. Taxpayer Rogers owes 1040 taxes for the period ending 12/31/08. The tax assessment date is 06/01/09 which established the original CSED as 06/01/19. Rogers, who is in the Army Reserves, gets called up for combat duty and enters the combat zone on 05/10/14. He subsequently leaves the combat zone on 03/01/15. He submits an offer in compromise on 04/20/15, it is rejected on 10/17/15 and the rejection is not appealed.

Both case actions, entering the combat zone and submitting the offer in compromise, suspend and extend the CSED. The combat zone duty suspends the CSED from 05/10/14 through 03/01/15 plus 180 days (through 08/28/15). Consideration of the offer in compromise suspends the CSED from 04/20/15 through 10/17/15 plus an additional 30 days for the rejection appeal period (through 11/16/15).

However, because these case actions overlap, the CSED will be suspended only from the date Rogers enters the combat zone (TC 500 cc 56 on 05/10/14) through the date the offer in compromise is rejected and the rejection appeal period ends (TC 481 on 11/16/15). In this case, the overlapping of the two case actions (from 04/20/15 to 08/28/15) is considered in the CSED extension only once. If you are a tax geek looking for guidance, see IRM 5.1.19.3(2). As a result of the above, the CSED will be extended 555 days from the original CSED of 06/01/19. The new CSED will be 12/08/20.

Do YOU need help evaluating your CSED?
While you could go through the hassle of calculating your CSED, do you really want to? In this post from our sister site, we talk about some of the nitty-gritty details of the CSED. We also talk about how you can have US calculate the CSED for you for a flat $75 fee for an unlimited number of years. So if you want to know your CSED but don’t feel like calculating it, why not head on over to the other site and shoot us an email or give us a call?

What is the IRS Matching Program?

When a taxpayer earns income, the issuing party will provide them with an IRS form. This may include a Form W2, Form 1099-MISC, Form 1099-DIV, Form 1099-INT, etc. The key thing to remember is that not only does the taxpayer receive this form, but so does the IRS. Well, at some point in time, the IRS runs “checks” to make sure that the income reported on these forms “matches” what is reported on the tax return. If there is a mismatch? Well, let’s just say that the IRS will send you a “love letter” bringing the discrepancy to your attention.

Understanding upfront matching

With this program, the IRS scrutinizes income reporting before issuing a taxpayer’s refund via the following steps:

  1. The IRS receives a tax return.
  2. The IRS matches the return against Forms W-2 and/or Forms 1099 that the IRS has received.
  3. If everything matches between the return and the information statements, the IRS releases the refund.
  4. If the IRS finds a mismatch, the IRS freezes the refund and sends a notice to the taxpayer asking for more information to prove their income and withholding.

Understanding CP2000 matching

When a tax return’s information doesn’t match data reported to the Internal Revenue Service by employers, banks and other third parties, the IRS will send a letter to the taxpayer. The letter is called an IRS Notice CP2000, and it gives detailed information about issues the IRS identified and provides steps taxpayers should take to resolve those issues.

This isn’t a formal audit notification, but a notice to see if the taxpayer agrees or disagrees with the proposed tax changes. Taxpayers should respond to the CP2000, usually within 30 days from the date printed on the notice. If a timely response can’t be made, taxpayers need to call the toll-free number shown on the notice and request additional time to respond.

The key thing to note is that CP2000 matching doesn’t typically happen immediately unlike upfront matching. In fact, it often happens months (if not almost a year) after a tax return is filed. Let’s take a look at a 2017 tax return as an example shall we?

A tax year 2017 return was due April 15th 2018, but could have been extended until October 15th 2018. During the early part of 2018, the payor’s of income (e.g. employers, banks, etc) send their corresponding IRS forms to the IRS. These in turn, populate the Wage & Income module associated with a taxpayers account (i.e. SSN or EIN) all the way until December 31st 2018. Once the extension deadline passes (10/15), the IRS matching program will begin to “flag” unreported/under-reported income between October 2018 and March of 2019 via a code 922 on the Wage & Income transcript (i.e. review of unreported income). The IRS will then send taxpayers CP2000 notices between March and October of 2019!

The income matching and CP2000 timeline illustrated

What Can You Do?

To avoid a mismatch, make sure that you report all of the income that is reported on the IRS forms that you receive. If you are working with a tax advisor, make sure that you give them all the documents you receive so they can file an accurate return and report all income received in a tax year. In addition, if you discover a tax return error, make sure to amend the return as soon as possible to avoid penalties or audits.

Need Help With a CP2000 Notice of Amending A Return?

We routinely assist taxpayers when they need help “fixing” a return. Furthermore, since we deal with filing old tax returns, we have the software to go back up to 10 years if needed!  So, if you need help, give us a call now via the number above or shoot us an email via the address in the footer on this page. We can help you address your letter and correct your return in as little as 48 hours.

What is the IRS Trust Fund Recovery Penalty?

When you pay your employees, you don’t pay them all the money they earned. The federal income tax and employees’ share of social security and Medicare taxes that you withhold from your employees’ paychecks are part of their wages that you pay to the U.S. Treasury instead of to your employees. Your employees “trust” that you will pay the withheld taxes to the U.S. Treasury by making federal tax deposits. This is the reason that these withheld taxes are called “trust fund taxes.”

If federal income, social security, or Medicare taxes that must be withheld aren’t either 1) withheld or 2) deposited or paid to the U.S. Treasury, the government can charge a very serious penalty called the Trust Fund Recovery Penalty (TFRP). If you are looking at an IRS Account Transcript for your SSN (or a tax lien), you may see notations for Civil Penalty, CIV-PEN, or 6672 Penalty. To get a better understanding of trust-fund taxes, you should also understand non-trust fund taxes.

What Are Non-Trust Fund Taxes?

Employers must match their employees’ Social Security and Medicare contributions. Those matching amounts are considered non-trust fund taxes. The IRS typically only holds a business responsible for non-trust fund taxes if they aren’t paid to the government. It does not hold individuals responsible. However, the exact liability rules depend on your business structure. If the business is “self-employed” or the sole principal of an LLC, a person may be held personally responsible for both trust-fund and non-trust fund taxes.

How Much Is the Trust Fund Recovery Penalty Amount?

The Tax Fund Recovery Penalty is not small. In fact, it is equal to 100% of the amount of taxes that were unpaid. Once again, that includes any income taxes withheld from an employee’s paycheck plus the employee’s Social Security and Medicare contributions. Note that Social Security and Medicare contributions are also referred to as FICA (Federal Insurance Contributions Act) taxes.

To illustrate, let’s say you paid an employee $2,000. You noted on the paycheck stub that you withheld $200 for income tax plus $124 for Social Security and $29 for Medicare. However, you didn’t send any of that money to the IRS. In that case, the unpaid tax bill is $353. You owe that amount plus that amount again as a penalty. That effectively doubles your bill!

Who Can Be Responsible for the TFRP?

If these unpaid taxes can’t be immediately collected from the employer or business, the TFRP may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, or paying over these taxes, and who acted “willfully” in not doing so. That includes owners, CEOs, and directors, but it can also include employees, third party payroll administrators, outside accountants, and bookkeepers.

To establish responsibility, the IRS has to prove two things. First, that the individual in question was responsible for remitting the taxes (i.e. the responsible party). Second, the individual must aware that the taxes were due and purposefully or willfully ignored the law (i.e. willfulness). For example, if you or someone related to your organization took the money set outside for payroll and income taxes and used it to pay another bill, that’s a clear sign of willfulness.

How does the IRS Assess a TFRP?

If the IRS believes that a company hasn’t been paying its trust fund taxes, a Revenue Officer from the IRS starts an assessment to identify the responsible party. As part of that process, the IRS requests multiple documents and lots of information from the company. This documentation includes bank statements and canceled checks, but it also includes details about who has passwords for online accounts and who knows PINs for bank cards. Basically, the IRS wants to see who’s paying the bills, who’s controlling the money, and where the money is going. They will also want to conduct an interview known as a 4180 interview (which is based on IRS-Form-4180).

Once the IRS identifies who was responsible and willful, they will assess the penalty.

What Forms Are Involved in the TFRP?

If the IRS thinks you are responsible, you will receive Letter 1153. This is the notice the IRS sends when the business has refused to pay the payroll taxes, and the IRS has decided to hold an individual personally responsible for the debt. Accompanying this letter is Form 2751.

Signing Form 2751 is an admission that a person is responsible for the unpaid payroll tax. Once the form is signed, it is almost impossible to reverse it. The only way to change the admission is to hire an attorney who can argue that you were coerced into signing. As such, if a person doesn’t agree with the letter, then it is not advised to Form 2751. The notice gives you 60 days to appeal, and to do so, you need to prove that you were not responsible for the unpaid tax debt.

What Is the Statute of Limitations on the TFRP?

If the IRS assesses a penalty, it has up to 10 years to collect it. During that time, if you have not made arrangements to settle/pay the penalties, then you can be subject to “enforced collections” (i.e. the IRS attempting to seize assets, garnish wages, offset refunds, etc.).

However, the IRS only has 3 years to assess the penalty. This clock starts ticking on April 15 after the year the trust fund taxes were due to be filed. For instance, let’s say a company was supposed to pay some trust fund taxes in October 2019. The IRS has three years from April 15, 2020 to assess the penalty. If the IRS doesn’t do anything by April 14, 2023, it can’t do anything after that date.

How Can You Settle the Penalty?

Like other types of tax debt, there are options to pay this penalty. If you don’t have the full payment, you can apply for a payment plan (a.k.a installment agreement). Alternatively, you can try to settle the debt for less than you owe through the offer in compromise program or through a partial payment installment agreement.

The important thing to note is that you should contact the IRS and set up an arrangement before the IRS tries to garnish your wages or seize your assets. It is also important to note that these penalties can not be discharged in bankruptcy.

Need help with your payroll tax problems?

If you have unpaid payroll taxes, have been assessed the TFRP, need a payroll provider to help you get back on track or just have tax debt in general, we can help! Simply click this link to our parent company site and complete the form at the bottom, shoot us an email via the address in the footer or give us a call.

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