ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – HOW TO AVOID HIDDEN TRAPS WHEN CONTESTING AN IRS TFRP ASSESSMENT
By Robert S. Schriebman
The TFRP is known as the Trust Fund Recovery Penalty. It is an IRS personal level assessment for unpaid corporate or LLC employment and withholding taxes (payroll taxes). It is roughly 60% of the amount owed by the corporation or LLC. This penalty is usually assessed by an IRS Revenue Officer after he/she completes an investigation and obtains supervisory approval. The TFRP notice must be sent to the targeted individual by certified mail to recipients last known address.
If you are assessed the TFRP you have a right to administratively challenge the assessment without first having to pay it. There are times, however, when you can lose this right due to inadvertence or neglect. The recent US Tax Court case of Jason E. Shepherd illustrates how this can happen.
In this article I will briefly discuss the Shepherd case. Thereafter, I will show you the avenues available to you for a prepayment challenge.
The Case of Shepherd v. Commissioner (TC Memo 2020-45, April 13, 2020)
Jason Shepherd was a chief executive officer of a limited liability company (LLC). The LLC owed the IRS for unpaid payroll taxes. The assigned revenue officer sent Shepherd the required notice that he was the prime target for the TFRP. The IRS is required to send these types of notices by certified mail to a taxpayer’s last known address (IRC § 6672(b)(1)). The notice was returned to the IRS as being unclaimed and undeliverable as addressed. Shepherd closed the business and left no forwarding address. The Tax Court ruled that the revenue officer followed all proper procedures in issuing Shepherd’s TFRP assessment notice.
Shepherd became aware of the assessment when the IRS sent to him a notice giving him the opportunity for a Collection Due Process (CDP) hearing. At the hearing Shepherd did not challenge the TFRP, but only requested that his account be deemed uncollectible and placed in hardship status. He did not request an installment payment arrangement. After this hearing, Shepherd filed an Offer in Compromise (OIC) based on doubt as to liability. For the first time Shepherd challenged the legality of the TFRP assessment but was unsuccessful. His OIC was rejected by the IRS because they felt Shepherd was the proper target for the TFRP assessment.
A couple of years later, the IRS removed the hardship status granted in the earlier CDP hearing and sent Shepherd an opportunity for a second CDP hearing. It was at this second hearing that Shepherd, once again, sought to challenge the TFRP assessment. The hearing officer informed him that he had two prior opportunities to challenge the assessment and refused to consider Shepherd’s arguments. After this hearing, Shepherd filed a petition in the US Tax Court where he demanded to challenge the TFRP. The Tax Court judge ruled that it was too late for Shepherd to raise the issues of his responsibility for the LLC’s payroll tax compliance, or if he was responsible, his actions were not willful. He had two prior opportunities to challenge the TFRP. The first opportunity was the initial CDP hearing and the second opportunity was made through the OIC process.
What should Jason Shepherd have done to protect his rights to properly contest the proposed TFRP against him?
Ways to Contest the TFRP
There are several ways available to contest the proposed assessment of the TFRP so you do not wind up like Mr. Shepherd. Let’s look at the best ways to contest or protest the TFRP assessment.
1. File a Protest – When an IRS Revenue Officer decides to propose a TFRP assessment, the targeted taxpayer is sent Letter – 1153. This letter informs the taxpayer that the IRS has made a determination to assess the TFRP. The Notice will contain instructions on the preparation and submission of a formal protest and where to send the protest so it can be properly filed. The protest will then be assigned to the IRS Appeals Division where it will eventually be assigned to an Appeals Officer who will contact the taxpayer to set up an informal face-to-face conference. This conference is all important and must not be taken lightly. Witnesses, declarations, and other evidence are allowed to be presented. After the conference, the Appeals Officer will issue a decision.
2. Collection Due Process (CDP) Hearing – If you did not receive the 1153 letter, you will eventually receive a Collection Notice inviting you to file for a hearing to either dispute the TFRP assessment or to work out an alternative to enforced collection by establishing an installment payment arrangement, a suspension due to hardship, or an Offer in Compromise. Actually, you can do it all – dispute the TFRP assessment and if unsuccessful work out an installment agreement, hardship suspension, or OIC.
3. Offer in Compromise (OIC) Based Upon Doubt as to Liability – This is not an OIC based upon the ability to pay. The basis for this OIC is for you to present your case that you should not be assessed the TFRP at all. This is usually done through Declarations or Affidavits. This process was used by Mr. Shepherd without success. These types of OICs are difficult to get.
4. Going to the US Tax Court – If your CDP hearing is unsuccessful, you may be allowed to take your case to the US Tax Court. This avenue is only available if you have a timely filed a regular CDP petition as opposed to an equivalency petition. The Tax Court is the only federal court where you can get a hearing without first having to pay the TFRP.
5. File Form 843 and Begin the Refund Process – The 843 Form is a Claim for Refund. One form should be filed for each quarter involved in the TFRP proposed assessment. You will eventually be given an appeal’s hearing and if unsuccessful, you may sue the IRS for refund in the US District Court or the US Court of Federal Claims.
The Shepherd case illustrates what can happen if you are negligent and fail to take advantage of the forums available to timely contest a TFRP assessment. However, there are many avenues available to challenge the TFRP. Of course, the best advice is to not put yourself in a position where you are the target of the TFRP.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 40 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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