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IBA: The Corporate Veil Wears Thin with the IRS

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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.•

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  1. I will continue to pray that God keeps giving you the strength and courage to keep fighting for what is right and just so you are aware, you are an inspiration to those that are feeling weak and helpless as they are trying to figure out why evil keeps winning. God Bless.....

  2. Some are above the law in Indiana. Some lined up with Lodges have controlled power in the state since the 1920s when the Klan ruled Indiana. Consider the comments at this post and note the international h.q. in Indianapolis. http://www.theindianalawyer.com/human-trafficking-rising-in-indiana/PARAMS/article/42468. Brave journalists need to take this child torturing, above the law and antimarriage cult on just like The Globe courageously took on Cardinal Law. Are there any brave Hoosier journalists?

  3. I am nearing 66 years old..... I have no interest in contacting anyone. All I need to have is a nationality....a REAL Birthday...... the place U was born...... my soul will never be at peace. I have lived my life without identity.... if anyone can help me please contact me.

  4. This is the dissent discussed in the comment below. See comments on that story for an amazing discussion of likely judicial corruption of some kind, the rejection of the rule of law at the very least. http://www.theindianalawyer.com/justices-deny-transfer-to-child-custody-case/PARAMS/article/42774#comment

  5. That means much to me, thank you. My own communion, to which I came in my 30's from a protestant evangelical background, refuses to so affirm me, the Bishop's courtiers all saying, when it matters, that they defer to the state, and trust that the state would not be wrong as to me. (LIttle did I know that is the most common modernist catholic position on the state -- at least when the state acts consistent with the philosophy of the democrat party). I asked my RCC pastor to stand with me before the Examiners after they demanded that I disavow God's law on the record .... he refused, saying the Bishop would not allow it. I filed all of my file in the open in federal court so the Bishop's men could see what had been done ... they refused to look. (But the 7th Cir and federal judge Theresa Springmann gave me the honor of admission after so reading, even though ISC had denied me, rendering me a very rare bird). Such affirmation from a fellow believer as you have done here has been rare for me, and that dearth of solidarity, and the economic pain visited upon my wife and five children, have been the hardest part of the struggle. They did indeed banish me, for life, and so, in substance did the the Diocese, which treated me like a pariah, but thanks to this ezine ... and this is simply amazing to me .... because of this ezine I am not silenced. This ezine allowing us to speak to the corruption that the former chief "justice" left behind, yet embedded in his systems when he retired ... the openness to discuss that corruption (like that revealed in the recent whistleblowing dissent by courageous Justice David and fresh breath of air Chief Justice Rush,) is a great example of the First Amendment at work. I will not be silenced as long as this tree falling in the wood can be heard. The Hoosier Judiciary has deep seated problems, generational corruption, ideological corruption. Many cases demonstrate this. It must be spotlighted. The corrupted system has no hold on me now, none. I have survived their best shots. It is now my time to not be silent. To the Glory of God, and for the good of man's law. (It almost always works that way as to the true law, as I explained the bar examiners -- who refused to follow even their own statutory law and violated core organic law when banishing me for life -- actually revealing themselves to be lawless.)

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