Agreements with Creditors

by | Business Law

Agreements with creditors didn’t shield president from trust fund recovery penalty.

The trust fund recovery penalty, which applies to the failure to withhold the proper amount of taxes out of employees pay and to pay such amounts to the IRS, can be imposed on any “responsible person” that fits into two categories under Code Sec. 6672. The penalty is a 100% penalty, meaning that the responsible party can be penalized the same amount as the amount of taxes that were not paid. This results in the IRS being able to recover double the amount due.

Being a “responsible person” is, therefore, a high risk position. Therefore, determining who is a “responsible person” is critical. The first category in determining a “responsible person” is anyone who is responsible for collecting, accounting for, and paying over payroll taxes, and secondly, anyone who willfully fails to perform this responsibility. Thus, the responsible person can include any party within the business who fits this criterion, no matter how high their position in the company. In order to fully grasp the responsible person, a list of factors was put into action by the Fourth Circuit to determine if that employee (1) served as an officer or director of the company; (2) controlled the company’s payroll; (3) determined which creditors to pay and when to pay them; (4) participated in the corporations day-to-day management; (5) had the ability to hire and fire employees; and (6) possessed the power to write checks.

The IRS test concludes that any person who holds financial power or is defined by any of these categories or criteria can be subject for the penalty. For example, the president, treasurer and majority shareholder of NCI was found liable for the trust fund recovery penalty. The courts found him liable after he failed to remit taxes from the employee’s checks to the IRS. He tried to defend by saying was not a responsible party and was shielded because the non-payment resulted from his compliance with agreements NCI had reached with creditors which resulted in there being insufficient monies to pay the IRS after payment of the creditors pursuant to their agreements.

He tried to appeal this charge but because he fit into five of the six factors, the courts held that he was in fact the “responsible party” and had a duty to pay the trust fund monies before paying the creditors. This penalty is very serious. As a side note, because the penalty was assessed against both NCI and the “responsible party, NCI was forced to declare bankruptcy.

IRS Issues Rules for Providing K-1s Electronically

Issue Number: IR-2012-21

The IRS has recently provided guidance for partnerships to file Schedule K-1s, Partners Share of Current Year Income, Deductions, Credits, and Other Items electronically. New guidelines have been recognized for establishments, such as partnerships, which are required to file a K-1 every year with the IRS and obtain a copy for their partners. These new guidelines are created to help partners understand the specifics associated with the K-1 and eliminate the hassle of printing and mailing since they are now available to be sent electronically.

Certain provisions apply to a K-1, which are provided in Revenue Procedure 2012-17 . Such provisions describe when a partner may provide K-1s electronically to the other partners instead of sending a hard copy. The eligibility to begin sending these copies electronically must first be coincided with the other partners. These new provisions resemble the rules governing the electronic furnishing of the 1099 and W-2’s.

Under the Revenue Procedure is an explanation of how the consent can be provided electronically, which includes e-mail security and the partner’s internet page. This explanation further instructs that the partners are to be informed about changes in software, the process of accessing and printing electronic statements and the responsibility delegation if the K1 does not successfully deliver electronically.

Most often, the K1 should be made available to its recipients based on the due date of Form 1065, U.S Return of Partnership Income. If your partnership is operating based on the calendar year, the due date is April 17, 2012.