ASK THE EDD ATTORNEY – PROTECTING YOURSELF FROM THE TRUST FUND RECOVERY PENALTY (TFRP) – HOW TO MAKE THE PROPER DESIGNATION
By Robert S. Schriebman
The personal income taxes and Social Security etc taxes withheld from an employee’s paycheck by the employer are known in the tax law as the “Trust Funds.” Many years ago Congress enacted legislation making all employers trustees of their employees’ withholding taxes. Under IRC § 6672 any person required to collect, truthfully account for, and pay over these taxes may be personally liable to the IRS if these trust funds are not timely and properly remitted on a quarterly basis.
Federal tax law allows you to designate a partial payment if that payment is made “voluntarily.” A voluntary payment is a term that needs explanation. It does not mean a payment made before the IRS throws you in jail for tax evasion. Rather it means a payment made outside of a formal installment payment agreement. A voluntary payment can be designated to the trust fund portion in a situation where there are corporate level payroll tax deficiencies. So, in a typical payroll tax deficiency situation, the tax debt, by law, is divided between the “trust fund” portion “non-trust fund” portion (the portion of payroll taxes matched by the employer and not withheld from the employee’s paycheck).
If your corporation owes back IRS payroll taxes, you can reduce and even eliminate your personal exposure by designating voluntary payments to the trust fund portion of the overall corporate deficiency.
On January 5, 2018 Mr. Weder sought a refund claim because he believed that he over paid the trust fund portion. Weder met with IRS agents and told them verbally that the payments he was personally making should be applied to the trust fund portion. Weder sued the IRS in the U.S. District Court in Oklahoma to recover his excess trust fund portions. Weder lost because he did not properly make his designations under the law.
In this article we will look at the Weder case and learn how to properly make a designation to the trust fund. T. W. Weber v. US, 2018FED ¶39,780.14, (Jan. 5, 2018)
The Case of T.W. Weder
If a proper trust fund designation is not made, the IRS will apply a voluntary payment any way it wants to. Usually an undesignated payment is first applied to accruing interest, then the penalties, and finally to the actual tax portion owed. Weder sought a refund because he believed he overpaid the trust fund portion. He did not. Weder failed to properly designate his voluntary payments. He orally told IRS agents where he wanted his payments to go. The IRS is not bound by oral instructions. This is why Weder lost. To paraphrase Samuel Goldwyn, ‘An oral trust fund designation is not worth the paper it’s written on.’
How to Make a Proper Trust Fund Designation
Years ago the IRS issued revenue procedures and revenue rulings instructing taxpayers how to properly designate payments. If these instructions are followed the IRS must apply the money where it is told. If the IRS fails to follow these instructions, the entire IRS accounting can be undone internally and reconfigured. This can result in the avoidance of personal exposure to the trust fund portion as discussed above. The Revenue Procedures are 84-58 and 2002-26. The Revenue Rulings are 73-305 and 79-284.
The trust fund designation must be on the actual payment check. It should be highlighted with a highlighting marker in yellow. You should put down the EIN of the company, and tell the IRS to apply the payment to the “trust fund portion.” It would also help to site the revenue rulings, etc. stated in the prior paragraph. Do not make the mistake of making the designation in the text of the cover letter and fail to state it on the check itself.
Trust fund designations can only be made with payroll taxes. They cannot be paid with income taxes. The designation must be specifically stated on the check itself and never verbally.
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.
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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