It’s not unusual for companies experiencing a cash crunch to use the IRS as a bank and not pay payroll taxes. These companies always believe a turnaround is just around the corner and they will be able to make up the delinquency. However, if the company can’t pay, the IRS has the right to identify the “responsible person” it believes was the leading force behind such non-payments and hold them personally liable for the taxes if they “willfully” violated their duty to pay the taxes.
A client recently committed this mortal sin and was personally assessed over $200,000 for failure to pay payroll taxes.
Here’s how we attacked this:
Before there was even an assessment, we had hearings with the Revenue Officer assigned to the case. Unfortunately, as in most cases, the Revenue Office was not that interested in doing a lot of hard digging into the facts of a case and evaluating its legal merits. They are more interested in trying to learn just enough information so they can make a plausible claim that you are liable. After completely disregarding our position, the Revenue Office assessed our client over $200,000 in Trust Fund Recovery Penalty. So naturally, we appealed the assessment.
The IRS appeals process has many procedural requirements and formalities. Importantly, it requires a complete and thorough understanding of the facts of the case and the legal basis the IRS asserted in making the assessment.
In this case, we first filed a Freedom of Information Act Request to find out what the IRS knew about the business and whether they were going after any other persons. With this knowledge we prepared our arguments to meet their concerns, and also compared our situation to that of any person they were looking at.
Second, the definition of “responsible person” has many elements. We researched the law and over twenty court cases, analyzed every element, and presented specific facts showing why our client did not meet any of the elements.
Next, we attacked the “willful” factor. Again, we evaluated over twenty court cases, and presented specific facts showing why our client did not meet the “willful” requirement.
Finally, we had patience. The appeals process took 14 months (not counting the 5 months for the audit before the appeal started).
Having worked on many audit issues and filed many IRS Appeals, we understand the IRS does not like to lose court cases. The reason is that if the IRS loses, then all future taxpayers can rely on the case to refute similar IRS claims. Our strategy was to plant doubt that the IRS would prevail if there was litigation. We essentially treated this matter as if it was a final trial. We also wanted to give the IRS an excuse to rule in our favor. We laid out a roadmap so the IRS could exonerate our client and allow it to save face. If we created enough uncertainty in their mind, yet gave them a way out, we felt we would prevail. We also clearly let them know that if we did not win on Appeal, we were prepared to take the next step: litigation.
The ultimate result: The Appeals Officer offered to settle for less than 50% of the original assessment. We secured a savings of over $100,000 for our client. Suffice to say, the client was quite happy. In our follow-up discussions we asked the Appeals Officer, why she settled. She simply replied, there was risk for the IRS to continue to litigation and she did not want to be in a losing position. Just as we had anticipated.
The process isn’t for the faint-hearted. The IRS can be ruthless and stubborn when trying to settle a case. However, if your attorney does his/her research, exhaustively prepares and strongly asserts your position with the IRS, you can prevail.