Trust-Fund Recovery Penalty Defense Memo
| Party | Identifier (example) | Role |
|---|---|---|
| Cascade Coast Cannabis LLC | EIN 88-0000010 | Employer — delinquent Form 941 deposits |
| [Example: A. Rivera] | SSN redacted | Operations manager — proposed responsible person (client) |
| [Example: M. Chen] | SSN redacted | Managing member — also proposed responsible person |
| [Example: outside payroll service] | — | Filed 941s; did not control funding |
Engagement routing. Tier: Active TFRP matter — representation · Posture: Posture-neutral (adult-use operator) · Active IRS matter: Yes — proposed §6672 assessment · Services indicated: §6050I Cash Compliance (root cause) · §6321 / §6331 Collections Relief (if assessed)
Prepared for the named individual under a representation engagement (Form 2848). This example is illustrative and does not constitute tax or legal advice to any reader; no client relationship is created by viewing it, and it describes no real person or IRS determination. The trust fund recovery penalty is decided on the individual facts of responsibility and willfulness; nothing here is a promised outcome. Positions are supported with contemporaneous records, and the deadlines are treated as hard.
Two questions decide a trust-fund case
Cascade Coast fell behind on Form 941 employment-tax deposits, and the IRS has proposed a trust fund recovery penalty under §6672 against the individuals it believes are responsible — including our client. The penalty equals 100% of the trust-fund portion (the employees' withheld income tax and their share of FICA, held in trust under §7501 — not the employer's share). The case turns on two questions only: was the client a responsible person, and did they act willfully?
On the facts as reported, the client's authority over funding decisions was limited — a defense to the "responsible person" prong — and payments to other creditors were made by someone else, going to willfulness. Exposure is the trust-fund portion per quarter; the number is illustrative and confirmed only against the actual 941s, bank records, and the Form 4180 interview.
The matter, reduced to what decides it
Facts below are fabricated for illustration; a real matter is built from the 941s, bank records, signature cards, and the Form 4180 interview.
Matter summary
Employer accrued unpaid trust-fund taxes over several quarters during a cash-flow crunch. The IRS has issued Letter 1153 with Form 2751 proposing to assess the TFRP personally against the client; a 60-day window to protest to Appeals is running.
IRS notice summary
Letter 1153 sets out the proposed periods and the trust-fund amount by quarter. The proposal follows a Form 4180 interview (or the IRS's attempt at one) used to determine responsibility and willfulness.
Payroll chronology
Wages were paid each period and the 941s were filed by an outside payroll service, but federal tax deposits fell short in the quarters at issue (Exhibit A). The gap coincides with a documented liquidity squeeze.
Deposit history
Deposit records show which liabilities were funded and which were not, and in what order — the evidence that decides willfulness. The bank and payroll support index (Exhibit C) ties each deposit and check to source.
Control & decision authority
Who could sign checks, direct payments, hire and fire, and decide which creditors were paid — mapped in the org chart (Exhibit B). The client's authority was operational, not financial; funding decisions sat elsewhere.
Witness / document list
Signature cards, the operating agreement, board/member resolutions, email directing payments, and witness statements are catalogued so responsibility and willfulness are argued from the record, not assertion.
Responsibility, willfulness, and exposure
Responsible-person analysis (§6672(a))
§6672(a) reaches any person required to collect, truthfully account for, and pay over trust-fund taxes who willfully fails to do so. "Responsible person" is a status question — duty and effective authority over the funds — decided on factors like check-signing authority, control over disbursements, and power to hire and fire and to direct which creditors are paid. Title alone is not control. The analysis applies each factor to the client's actual authority (Exhibit B).
Exposure analysis
The penalty equals the trust-fund portion only — withheld income tax plus the employees' FICA share, held in trust under §7501 — not the employer's FICA share or FUTA. It is computed per quarter. Because the TFRP is a divisible tax, exposure can be tested by paying the tax for a single employee for a single quarter, filing a Form 843 claim for refund, and litigating in district court or the Court of Federal Claims — preserving a merits challenge without paying the whole assessment.
§6672 does not care about §280E. The trust-fund duty exists for any employer regardless of license type or Schedule; rescheduling to Schedule III changes income-tax treatment, not payroll trust-fund obligations. This deliverable is posture-neutral.
But the cash link is real. The same cash-intensive operations that create §6050I reporting exposure also drive the liquidity crunches that cause missed deposits — so a §6672 matter is often a signal to fix cash handling and Form 8300 compliance at the root, not just defend the penalty.
Defense themes
- Not a responsible person — the client lacked effective authority over which creditors were paid.
- Not willful — the client did not knowingly prefer other creditors over the United States, and did not act with reckless disregard.
- Funds encumbered — to the extent funds were restricted, they were not "available" to pay the trust-fund liability.
- Allocation of payments — voluntary payments already made should be designated to the trust-fund portion first.
- Note: ordinary "reasonable cause" is not a defense to §6672 — the standard is willfulness, so the defense is built on responsibility and willfulness, not hardship alone.
Response strategy
Prepare the client for (or reconstruct) the Form 4180 interview; file a written protest to the IRS Independent Office of Appeals within the 60-day Letter 1153 window; assemble the responsibility/willfulness record; and preserve the divisible-tax / Form 843 refund-litigation route as leverage and backstop. Coordinate with any collection activity so a lien or levy under §6321 / §6331 does not proceed unaddressed.
Responsible-person issue register
Each issue lists the controlling authority or evidence and the defense posture. Conclusions are illustrative and not asserted; a real matter turns on its record. Exposure bands are order-of-magnitude illustrations.
| Issue | Controlling authority / evidence | Illustrative exposure | Posture |
|---|---|---|---|
| Responsible-person status | IRC §6672(a); check-signing + disbursement authority | All or nothing per person | Contest |
| Willfulness | IRC §6672(a); payment-ordering evidence | Drives liability | Contest |
| Trust-fund amount by quarter | IRC §7501; Form 941; deposit records | Trust-fund portion only | Verify |
| Payment designation / encumbered funds | Voluntary-payment allocation; loan covenants | Reduces exposure | Assert |
| Employer-share / FUTA mis-inclusion | IRC §7501 (trust-fund scope) | Not subject to §6672 | Exclude |
| Divisible-tax refund route | Form 843 claim; district court / CFC | Preserves merits challenge | Preserve |
Defense actions, with owner and deadline
Owners and targets are placeholders; the 60-day protest window is the hard clock.
| Action | Why | Owner | Target |
|---|---|---|---|
| File written protest to Appeals (Letter 1153) | Preserve the administrative challenge | J. Williams, EA | [within 60 days of 1153] |
| Prepare / reconstruct the Form 4180 record | Control the responsibility + willfulness facts | EA + client | [+14 days] |
| Assemble control & authority evidence | Signature cards, resolutions, payment directives | Client | [+10 days] |
| Recompute trust-fund amount by quarter | Strip employer-share / FUTA; verify §7501 scope | J. Williams, EA | [+21 days] |
| Preserve divisible-tax / Form 843 route | Backstop merits challenge if Appeals fails | J. Williams, EA | [if assessed] |
| Coordinate collections (§6321 / §6331) | Prevent lien/levy while the matter is open | J. Williams, EA | [ongoing] |
Supporting shells
Exhibit A — Payroll timeline
| Quarter | 941 filed | Trust-fund liability | Deposited | Shortfall |
|---|---|---|---|---|
| [Q1] | Yes | $— | $— | Current |
| [Q2] | Yes | $— | $— | Short |
| [Q3] | Yes | $— | $— | Short |
Exhibit B — Org chart (control & authority)
| Person | Title | Sign checks? | Direct which creditors are paid? | Hire / fire? |
|---|---|---|---|---|
| [M. Chen] | Managing member | Yes | Yes | Yes |
| [A. Rivera] (client) | Operations manager | Limited | No | Operational only |
| [Outside payroll service] | Vendor | No | No | No |
Exhibit C — Bank & payroll support index
| Document | Supports | Source |
|---|---|---|
| Signature cards | Check-signing authority | Bank |
| Bank statements + cleared checks | Payment ordering / willfulness | Bank |
| 941s + payroll registers | Trust-fund amount by quarter | Payroll service |
Exhibit D — Chronology of notices
| Date | Notice / event | Action required | Deadline |
|---|---|---|---|
| [date] | Form 4180 interview | Prepare / represent | [date] |
| [date] | Letter 1153 + Form 2751 | File protest to Appeals | [+60 days] |
Exhibit E — Contact log
| Prong | Evidence strength | Impact if lost | Posture |
|---|---|---|---|
| Responsible person | Favorable | High | Lead defense |
| Willfulness | Mixed | High | Develop record |
| Trust-fund computation | Verify | Medium | Recompute |
Contact log: each call/letter with the Revenue Officer and Appeals — date, party, topic, outcome — logged so the record of the matter is complete.
Findings, actions, and what's open
- Case turns on responsible-person status and willfulness (§6672(a)).
- Client's authority was operational; funding decisions sat elsewhere.
- Penalty is the trust-fund portion only (§7501) — strip employer share / FUTA.
- Divisible-tax / Form 843 route preserves a merits challenge.
- File the Appeals protest within 60 days of Letter 1153.
- Build the Form 4180 responsibility/willfulness record.
- Recompute the trust-fund amount by quarter.
- Fix cash handling / §6050I at the root.
- 60-day Letter 1153 protest window — hard clock.
- Any collection due-process notice (§6321 / §6331).
- Form 843 filing if pursuing the divisible-tax route.
- Signature cards + bank statements for the quarters at issue.
- Operating agreement + resolutions on authority.
- Emails/directives showing who ordered payments.
Facing a §6672 trust-fund penalty?
A licensed Enrolled Agent builds the responsible-person and willfulness record, files your Letter 1153 protest on time, strips the penalty to the true trust-fund amount, and preserves the divisible-tax refund route — on Form 2848, so the IRS deals with your representative. Start with a consult.
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