New Owners, Departing Officers and the Quarters You Did Not Control

A trust fund investigation starts with the names on the paperwork: articles of incorporation, signature cards, the signer of the Form 941. IRM 5.7.4.5 actually tells Revenue Officers not to routinely target all of the principals without specific reasons for each person. But paperwork is often out of date. People leave. People arrive. Signature cards do not get updated. Secretary of State filings lag.

The law cares about who had responsibility and acted willfully for each period. Timing is one of the most practical defenses in TFRP work, and it is frequently overlooked.

The Penalty Is Built Period by Period

The IRS assesses the Trust Fund Recovery Penalty for specific tax periods, usually Form 941 quarters. IRM 5.7.4.5 requires the Revenue Officer's recommendation on Form 4183 to address every person considered and to indicate whether each individual is fully responsible for all periods or partially responsible for some. When officers are partially responsible for a quarter, the IRM tells the Revenue Officer to explain how payments from that officer should be cross-referenced.

So the question is never just "were you an officer?" It is "were you responsible, and willful, for this particular quarter?"

If You Left Before the Problem Started

If you resigned, sold out or were removed before a quarter began, you generally had no duty to collect, account for or pay over that quarter's taxes. The challenge is proving the date.

The IRS will look at its own records first. IRM 5.7.4.2.7 lists business and bank records Revenue Officers may review to determine appointments and resignations of officers and directors, changes to duties, and correspondence to the bank about changes to signature cards or PIN assignments. Use the same categories to build your proof:

• your resignation letter and any acceptance by the board;
• corporate minutes recording your departure or removal;
• the stock purchase or membership interest redemption agreement, if you sold out;
• bank correspondence removing you as a signer and disabling your online banking credentials;
• state filings updating officers or managers;
• your final paycheck and any new employment; and
• emails showing you were cut out of financial decisions.

A gap between your actual departure and the paperwork is common. The IRS manual itself says signature authority may be merely a convenience, and that owning stock or holding an office cannot be the sole basis for a responsibility finding. If you were still on the signature card but had no access and made no decisions, show it.

If You Left in the Middle of a Quarter

This is harder. Trust fund taxes are withheld when wages are paid and must be deposited on a schedule during the quarter. If you were in control on some payroll dates and gone by others, the analysis may split the quarter. That is exactly why the IRM contemplates partial responsibility for a quarter and cross-referencing of payments.

Get the payroll register. Match payroll dates and deposit due dates to the dates you were in control. Then argue for the portion that tracks your actual tenure.

If You Stayed and Disagreed

Some officers stay on, object, and get overruled. IRS guidance is not sympathetic. IRM 5.7.3.4.1.2 says officers and higher-level non-owner employees may be required to quit, rather than obey an owner's order to pay other creditors instead of current trust fund taxes, to avoid responsibility.

That makes the resignation date doubly important. It is when your responsibility arguably ended, and it is evidence that you refused to go along.

If You Arrived After the Taxes Went Unpaid: The Slodov Rule

Now the other direction. You bought the company, or took over as president, and discovered the business already owed payroll taxes from before your time. Are you on the hook for those old quarters?

The Supreme Court answered that in Slodov v. United States, 436 U.S. 238 (1978). The taxpayer bought the stock of three corporations and took over management. At the time, the corporations owed withholding taxes collected before he arrived and had no cash. He used money that came in afterward to pay operating expenses rather than the old taxes.

The Court held that a responsible person may violate section 6672's pay-over requirement by willfully failing to pay over trust funds collected before he took control if, at the time he assumed control, the corporation had funds impressed with a trust under section 7501. But the Court also held that section 7501 does not impress a trust on after-acquired funds. So the responsible person does not violate section 6672 by using employer funds for other purposes when, at the time he took control, there were no funds available to satisfy the tax and the funds later generated were not traceable to the taxes withheld.

The IRS's legal reference guide applies the holding the same way. IRM 5.17.7.2.2 says a person who becomes responsible when the business lacks funds to pay a liability that arose under prior management, and who uses funds acquired afterward to pay operating expenses rather than the prior delinquency, is not personally liable for that delinquency under section 6672. If funds were available when the person took control and were not used to pay the old taxes, the person is liable to the extent of those funds.

What Slodov does not do

Slodov is about taxes collected before you took control. It does not protect you for quarters that accrued on your watch. Once you are in charge, the new withholding is your responsibility. A new owner who inherits an old liability and then lets current deposits slide has two problems, not one.

Slodov also turns on facts. Was there cash in the account when you took over? Were there receivables that represented the withheld taxes? The IRM language, "to the extent of the funds available," means the Revenue Officer will look at the balance sheet on your first day.

Proving it

• bank statements for the day you took control;
• the closing statement or purchase agreement showing what you acquired and what liabilities were disclosed;
• a list of what was paid after you arrived, and from what source; and
• evidence that later deposits came from new operations, not old receivables tied to prior payrolls.

Buying a Business With Payroll Tax Problems

If you are buying a company, do diligence on payroll taxes before closing. Ask for IRS account transcripts for the employer identification number, the last several Forms 941, and proof of deposits. A seller who cannot produce them is telling you something.

The prior owner who was responsible and willful for the old quarters remains exposed to the TFRP for those periods. You can also face separate issues as a lender or financier under IRC 3505 if you fund payroll knowing the taxes will not be paid. See our guide on lender and supplier liability under IRC 3505.

Raising Timing in the Protest

Timing arguments belong in the Letter 1153 protest, period by period. List each quarter, state your status during it, attach the documents, and concede the quarters you cannot contest. A period-by-period protest gives Appeals something concrete to agree with, which a blanket denial does not. See our protest guide for the format.

And when more than one person is responsible for the same quarter, the IRS can assess each of them, but it collects only once. Our guide on multiple responsible persons explains how payments are credited.

For an overview of how the firm handles payroll tax and trust fund cases, see the main site's payroll tax page.

Calendars win TFRP cases more often than people expect. If your name is on quarters you did not control, call (813) 229-7100. Let's talk.