ILNews

IBA: The Corporate Veil Wears Thin with the IRS

Back to TopCommentsE-mailPrintBookmark and Share
By Adam D. Christensen, Dutton Legal Group LLC
 

christensen-adam-mug.jpg Christensen

The legal metaphor “corporate veil” is doubly a tantalizing legal term of art and an effective marketing tool to illustrate to potential clients the benefits of corporate formation.

But attorneys and their clients should not rely on this emblematic security blanket because the country’s most notorious creditor, the Internal Revenue Service, can slice it to shreds with devastating ease.

Section 6672 of the Internal Revenue Code authorizes the IRS to assess the Trust Fund Recovery Penalty (“TFRP”) against any responsible owner, officer, or other party responsible for collecting, accounting, or paying taxes held in trust by a business. The most common corporate trust fund taxes are employment taxes – withholdings and employee shares of Medicare and FICA – excise taxes, and sales taxes.

The amount of the TFRP is equal to the total trust taxes the business collected but willfully failed to turn over to the IRS. Depending on how far behind the business was on its trust fund taxes, the assessment can easily reach six figures or more.

As is the case with most IRS penalty assessments, “willfulness” is broadly defined to include truly nefarious actions (absconding to Tahiti with the taxes) and comparatively innocuous ones (using the taxes to pay other business liabilities such as wages themselves).

To review, the concept behind the “corporate veil” is that owners and officers of an incorporated entity (Inc., LLC, LLP, etc.) can shield themselves from personal liability for even the business’s willful actions, including contract defaults, most torts, and failure to pay debts, including taxes. When a lawsuit is filed against the business that includes its owners/officers as individual defendants, the daunting burden to “pierce the corporate veil” lies with the plaintiff. This burden is so great that, realistically, only plaintiffs with means or evidence of owner/officer malfeasance will be able to keep the individual defendants from being dismissed.

However, the IRS does not have to overcome this burden to assess the TFRP. This could mean massive personal liability assessments against owners, officers, and even accountants and corporate counsel, who exert control over the taxes held in trust by the business. Here is where the “corporate veil” unravels quickly.

When a business fail to pay its trust fund tax liabilities, an IRS Revenue Officer can be assigned to investigate in as little as 60 days. Once contacted by the Revenue Officer, the business will have a brief opportunity to pay its debts in full, usually 30 days. If it cannot, the Officer will move forward with TFRP assessment.

First, interviews are held between the Revenue Officer and any person involved in the operations of the business. Typically, this includes all business owners and officers. However, the IRS will also seek to assess the TFRP against in-house accountants and attorneys who exhibit “significant control” over the business’s finances. Indeed, in sole proprietorships and closely-held business, the IRS may demand to interview owner/officer spouses, even if the spouse is not affiliated with the business.

Though counsel may represent any individual at the TFRP interview, the IRS will insist on a face-to-face or telephone interview with the alleged responsible party. If the individual fails to agree to this arrangement, the IRS will use its summons authority to compel the individual’s participation.

If the Revenue Officer finds sufficient evidence to assess the TFRP against one or more individuals, the IRS will issue Letter 1153, giving the parties 90 days to petition the United States Tax Court to appeal the assessment. If no appeal is filed, the TFRP is assessed on day 91.

To be clear, no new liability is assessed by the TFRP. Rather, a portion of the business’s liability is shifted to the responsible individuals. However, to the blindsided business owner, this is small comfort given the federal tax liens that may be filed and the potential for IRS levy and garnishment actions. Even if the business closes, the TFRP remains. What’s more, the TFRP, unlike some personal income tax debts, is not dischargeable in a bankruptcy.

Despite the veil’s assumed protections, the only cure for the TFRP is to negotiate a payment plan with the IRS collections department to pay the underlying debt as well as the penalty, a painful process without a catchy metaphor.•

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. Call it unauthorized law if you must, a regulatory wrong, but it was fraud and theft well beyond that, a seeming crime! "In three specific cases, the hearing officer found that Westerfield did little to no work for her clients but only issued a partial refund or no refund at all." That is theft by deception, folks. "In its decision to suspend Westerfield, the Supreme Court noted that she already had a long disciplinary history dating back to 1996 and had previously been suspended in 2004 and indefinitely suspended in 2005. She was reinstated in 2009 after finally giving the commission a response to the grievance for which she was suspended in 2004." WOW -- was the Indiana Supreme Court complicit in her fraud? Talk about being on notice of a real bad actor .... "Further, the justices noted that during her testimony, Westerfield was “disingenuous and evasive” about her relationship with Tope and attempted to distance herself from him. They also wrote that other aggravating factors existed in Westerfield’s case, such as her lack of remorse." WOW, and yet she only got 18 months on the bench, and if she shows up and cries for them in a year and a half, and pays money to JLAP for group therapy ... back in to ride roughshod over hapless clients (or are they "marks") once again! Aint Hoosier lawyering a great money making adventure!!! Just live for the bucks, even if filthy lucre, and come out a-ok. ME on the other hand??? Lifetime banishment for blowing the whistle on unconstitutional governance. Yes, had I ripped off clients or had ANY disciplinary history for doing that I would have fared better, most likely, as that it would have revealed me motivated by Mammon and not Faith. Check it out if you doubt my reading of this, compare and contrast the above 18 months with my lifetime banishment from court, see appendix for Bar Examiners report which the ISC adopted without substantive review: https://www.scribd.com/doc/299040839/2016Petitionforcert-to-SCOTUS

  2. Wow, over a quarter million dollars? That is a a lot of commissary money! Over what time frame? Years I would guess. Anyone ever try to blow the whistle? Probably not, since most Hoosiers who take notice of such things realize that Hoosier whistleblowers are almost always pilloried. If someone did blow the whistle, they were likely fired. The persecution of whistleblowers is a sure sign of far too much government corruption. Details of my own personal experience at the top of Hoosier governance available upon request ... maybe a "fake news" media outlet will have the courage to tell the stories of Hoosier whistleblowers that the "real" Hoosier media (cough) will not deign to touch. (They are part of the problem.)

  3. So if I am reading it right, only if and when African American college students agree to receive checks labeling them as "Negroes" do they receive aid from the UNCF or the Quaker's Educational Fund? In other words, to borrow from the Indiana Appellate Court, "the [nonprofit] supposed to be [their] advocate, refers to [students] in a racially offensive manner. While there is no evidence that [the nonprofits] intended harm to [African American students], the harm was nonetheless inflicted. [Black students are] presented to [academia and future employers] in a racially offensive manner. For these reasons, [such] performance [is] deficient and also prejudice[ial]." Maybe even DEPLORABLE???

  4. I'm the poor soul who spent over 10 years in prison with many many other prisoners trying to kill me for being charged with a sex offense THAT I DID NOT COMMIT i was in jail for a battery charge for helping a friend leave a boyfriend who beat her I've been saying for over 28 years that i did not and would never hurt a child like that mine or anybody's child but NOBODY wants to believe that i might not be guilty of this horrible crime or think that when i say that ALL the paperwork concerning my conviction has strangely DISAPPEARED or even when the long beach judge re-sentenced me over 14 months on a already filed plea bargain out of another districts court then had it filed under a fake name so i could not find while trying to fight my conviction on appeal in a nut shell people are ALWAYS quick to believe the worst about some one well I DID NOT HURT ANY CHILD EVER IN MY LIFE AND HAVE SAID THIS FOR ALMOST 30 YEARS please if anybody can me get some kind of justice it would be greatly appreciated respectfully written wrongly accused Brian Valenti

  5. A high ranking Indiana supreme Court operative caught red handed leading a group using the uber offensive N word! She must denounce or be denounced! (Or not since she is an insider ... rules do not apply to them). Evidence here: http://m.indianacompanies.us/friends-educational-fund-for-negroes.364110.company.v2#top_info

ADVERTISEMENT