Can you file an Offer in Compromise on a IRS trust fund recovery penalty?

If you have been assessed a trust fund recovery penalty by the IRS for unpaid employment taxes, you certainly must feel up against it. The IRS is aggressive on assessing and collecting trust fund taxes. The amount the IRS is seeking to extract from you can get sky high, very quickly. So what are your options? There is good news — you can file an Offer in Compromise (OIC) to settle the taxes that you owe.


You can't file Bankruptcy to discharge trust fund recovery penalty taxes, but you can negotiate a trust fund recovery penalty with an Offer in Compromise

I mention this because many of our trust fund recovery clients have filed bankruptcy. While the law allows for certain personal tax debts to be discharged, generally trust fund recovery penalties cannot be discharged.


Note: This is the general rule. Just like there are exceptions and certain debtors have been able to discharge student loan debt, there probably are very limited cases where trust fund recovery penalties have been discharged in bankruptcy. My thinking is that something must have been done wrong during the assessment that allowed the bankruptcy court to discharge the trust fund recovery penalty. 


How an OIC on a running business is different than an OIC for trust fund recovery penalty taxes

There are a few key distinctions between an Offer in Compromise on a running business and an Offer in Compromise for a trust fund recovery penalty:

  • In order to submit an OIC for a running business, any liable party must not contest the trust fund assessment.
  • The business is the taxpayer filing the offer for back payroll taxes; while an individual is the taxpayer that is filing an offer for trust fund recovery penalty. 
  • The business is trying to settle all employment taxes, which includes trust fund taxes and employment taxes. An OIC for trust fund recovery penalty is just settling the trust fund recovery penalty.
  • The business will try to settle for an amount at least equal to the trust fund recovery penalty, that way, no "responsible parties" will have to pay it. Rather, the business will. For an OIC on a trust fund recovery penalty, an individual can attempt to settle for as low as their Reasonable Collection Potential will allow.


Before you file an Offer in Compromise for trust fund taxes, have you looked at your other options?

There may be better ways to settle back trust fund taxes; it depends on your facts and circumstances. A partial payment installment agreement, or currently non-collectible status are two that come to mind.


What if you disagree that you should be liable in the first place? IRS Revenue Officers, the people tasked with assessing the  trust fund penalty, assess innocent people all the time. Many people make the mistake of not having proper legal counsel during the 4180 interview.


Additionally, you can appeal a trust fund recovery penalty, but there is only a limited of time to do so. What if you believe you were assessed the trust fund recovery penalty unfairly but you think it may be too late to do anything? There is a little known procedure called a "Claim for Refund" that will get you one more crack at disputing your trust fund liability. It is a very technical process and must only be handled by someone who knows exactly what they are doing.  


If you need assistance, contact us to schedule a free consultation.