The trust fund recovery penalty and LLCs.

• Author: Ellentuck, Albert B.
• Position: Limited liability companies

Unpaid payroll taxes are often liabilities of a business in bankruptcy. The payroll tax liability is created when the employer withholds income tax and the employees' share of FICA (collectively called the trust fund taxes) from employees but has not yet paid the withheld amounts to the IRS.

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Under Sec. 6672, any person who is required by law to collect, account for, and pay over any tax, and who willfully fails to do so, is liable for a penalty equal to the total amount of the tax (the trust fund recovery penalty (TFRP)).This penalty applies to responsible persons for willful nonpayment of withheld trust fund taxes to the government. (The failure to pay over trust fund taxes does not harm the employee, who is given full credit for the amounts that should have been turned over to the government.)

The IRS is prohibited from assessing the TFRP against a taxpayer without 60-day notice that the taxpayer is subject to an assessment of the penalty, unless the collection of the penalty is in jeopardy. An extension of the statute of limitation is also provided, to the later of:

* 90 days after the date on which the notice was mailed or delivered in person; or

* If there is a timely protest of the proposed assessment, 30 days after the IRS makes a final administrative determination on the protest.

Practice tip: In Chief Counsel Advice (CCA) 200532046, the IRS concluded that the statute of limitation on the assessment of the TFRP is the same as that of the underlying employment obligations. Thus, if the underlying obligation's statute of limitation is indefinitely extended because of fraud, the TFRP's statute of limitation is also indefinitely extended.

A responsible person is any person who is connected or associated with the limited liability company (LLC) in such a manner that he or she has the power to see that the trust fund taxes are paid. Responsible persons can include managers and member-managers. As a practical matter, the IRS views checksigning authority as proof an individual is a responsible person. However, this may not be the case if the individual rarely signs checks. While not conclusively proving responsibility, the ability of a member or manager to sign checks makes it difficult to overcome the IRS's presumption that the member, manager, or employee is a responsible person. While this is a facts-and-circumstances determination, the IRS considers certain factors in deciding which individuals are or could be...