Top Ten Factors to consider when protecting taxpayers against IRS trust fund or 100% Civil Penalty (6672) assessment or California Franchise Tax -Employment Development Department assessment under California Tax Code 1735:

1)  IRS looks at employment positions held by the individuals to be charged and the exact period during which he or she he held it and the actual duties of each office as shown by by-laws and corporate minutes.

2)  Corporate officers’ authority to sign the checks during specific time periods is also highly relevant. The number of checks signed and the purpose of each check should be reviewed. Obtaining copies of checks and bank records would be helpful in establishing whether the IRS would be able to make Civil Penalty assessment.

3)  IRS Form 941, 940 and EDD DE-8, DE-6 need to be reviewed. Were the IRS payroll tax returns signed by the officer, administrative clerk or a CPA?

4)  Review bank account balances to determine whether there were funds available to make payments to the IRS. Key dates to review are bank statements from the dates during which the tax returns were due and when the tax deposit was due. Questions to ask are: Was there adequate funds available to make the payments, which someone else refused to turn over to the IRS? Did the taxpayer resign before the tax return or the payments were due? If a taxpayer can show that he or she was no longer associated with the corporation and that the return had not been prepared but that he had called it to the attention of the other officers and had left them funds available to make the payment, it may be a decent challenge to the proposed payroll tax assessment against the individual.

5)  Who actually prepared checks? Who was responsible for filing the returns? Who signed the checks? The target officer by the IRS may just be a nominal officer who signed certain documents in a perfunctory manner.

6)  IRS will also look at who controls the money and who approves expenditures related to tax? Who is in charge of administrative matters of the corporation?

7)  Are there co-signers are required for checks? It is important to investigate who the cosigners are and the scope and extent of their authority.

8)  Look to see if there are any assets of the corporation which may be available to satisfy the taxes. Did any officer defraud the corporation of its assets? In some instances there were sufficient funds available for the taxes at the time the bankruptcy proceedings were started, and the Government was appraised of this fact. Key fact to consider is whether assets were available to pay the taxes which was diverted for other uses without the consent, authority or control by the target taxpayer.

9)  Review IRS statute of limitations to determine whether IRS may have blown the statute to assess payroll taxes against the officer.

10)  Willfulness - Knowledge. Tax attorney needs to argue that nonpayment of payroll tax was not willful. Did the taxpayer perform his duty to pay the taxes by preparing the checks to be sent to the IRS but a senior officer intercept the outgoing mail? (This actually happens regularly in small corporations) How much tax experience does the individual have?

Representing a client concerning IRS or EDD payroll tax assessment requires fact intensive analysis of the case. The above list is a baseline factor test which requires significant work. However, as you plan for litigation with the IRS, organizing documents and information relevant to the factor test will give you a jump on your discovery.

Victor J. Yoo, Tax Attorney
Los Angeles, California Tax Lawyer
Tax Lawyers Group, APC
Telephone: 310-234-5680