Trust Fund Recovery Penalty; Consequences of Fraudulent Conveyances

Fraudulent Conveyances in Employment Taxes

Employers who willfully fail to remit an employee’s withholding to the IRS are liable to the IRS for the “trust fund recovery penalty” (TFRP). Generally, the IRS will assess the Penalty against any responsible person who fails to collect and pay these taxes to the IRS. A responsible person can include a business owner, a corporate officer, director or office manager and a trustee or executor as well other individuals and entities.

Those who are subject to the TFRP may attempt to impede IRS collection efforts by conveying their personal or corporate assets to relatives or to nominee entities, without fully considering the civil and criminal tax consequences associated with making such transfers.  A fraudulent conveyance can be as simple as transferring an asset to a spouse or child, or may involve multiple entities and other devices. While there may be legitimate reasons for transferring an asset to a third party, making a fraudulent conveyance is not one of them.

IRS Lawsuit on a Fraudulent Transfer Scheme

An excellent illustration of an elaborate fraudulent transfer scheme is United States v. William Planes,et al (8:18-cv-02726) where  William  Planes (“William”) and his wife, Regina Planes (“Regina”), failed to pay employment taxes exceeding $9 million on behalf of  at least ten entities over a 12 year period. The following is a partial summary of what happened. I would, however, recommend reading the case in its entirety.

The IRS filed a lawsuit in the U.S. District Court, for the Middle District of Florida against William. In its complaint, the Government alleged that while employment taxes continued to accrue, but prior to the lawsuit being filed, the defendant, William Planes (William),  fraudulently transferred almost $600,000 to his wife Regina (Regina) Planes.

In furtherance of the scheme, Regina lied to the IRS by maintaining that she was not a financially responsible person of South Capital Construction, Inc. The Court subsequently entered a judgment against Regina finding that William made the transfer to Regina in order to prevent the IRS from collecting the penalty from him.

On November 5th 2018, the Government filed a second lawsuit seeking to:

1. Reduce a separate trust fund penalty of $529,000 assessed against William Planes in 2003 to a judgment.
2. Disregard the corporate entities that the defendants were using to impede IRS collections.
3. Apply the entities’ assets to the judgment.

A day after the IRS assessed $529,000 penalty against William, the defendant created the William Planes 2003 Irrevocable Trust and the Regina Planes 2003 Irrevocable Trust. These two trusts, in turn, owned six limited liability companies which William and Regina either owned or controlled.

The Government also requested and secured a temporary restraining order (TRO) on November 6th 2018, enjoining the defendants or anyone acting on their behalf or in concert with from transferring any entity asset.

On November 7, 2018 Regina was served with the TRO. Less than two hours later William transferred the sum of $160,000 from three of the entities bound by the TRO to Coast to Coast, an entity in which William is a director.  A contempt hearing followed. The Court subsequently found the defendants in contempt and converted the TRO to a preliminary injunction.

While this case has yet to be referred to the IRS Criminal Investigation Division, I suspect it will be given the dollar amount.

Trust Fund Recovery Penalty and Prosecution

The amount of the TFRP is for the most part irrelevant in the Government’s decision to prosecute an individual. Taxpayers have been prosecuted where the TFRP was far less. The following cases illustrate the dollar range in TFRP cases that have resulted in criminal prosecution:

1. On August 27, 2019, a North Carolina woman was sentenced to 14 months in prison for employment tax fraud for withholding and failing to pay over $78,937 in employment taxes deducted from the employees of a Pediatrician where she worked as an office manager, as well as the failure to pay over $35,472 representing the employer’s share of taxes. Instead, the defendant used the money to pay her credit card bills, go on personal vacations and fund a business venture. She also helped herself to $1.4 million from the Pediatrician’s bank account.
2. In June of 2019 a Long Island business man pleaded guilty to failure to pay over employment taxes to the IRS. According to the documents filed by the DOJ, the defendant owned and operated several steel erection businesses on Long Island. Over a four year period the defendant owed almost $500k in employment taxes. In May of 2011, the defendant changed the name of his business to BR Teck Enterprises Inc. and transferred ownership of the corporation to another individual. Despite transferring ownership of the business to a third party, the defendant continued to operate the business ad continued to pay over employment taxes. From January 2012 through June 2017, the defendant racked up an additional $950K in unpaid employment tax liability.

An Individual who owns or controls a business or is considered a responsible person who has a fiduciary obligation to accurately collect, account for and pay over to the Internal Revenue Service, all federal employment taxes withheld from its employees as well as the employer’s portion of any payroll taxes. Failure to remit such payments will invariably lead to assessment of the TFRP against an individual or entity that is considered responsible.

The above examples make clear that the transfer of corporate or individual assets to another person or an entity as a strategy to defeat or impede IRS collection efforts will seldom, if ever, work. This strategy is viewed by the Government as a deliberative process and has served as strong evidence in criminal prosecutions of intent to defraud the U.S. Government.

Alternatives other than the fraudulent transfer of assets are available when dealing with payroll tax issues. These issues can sometimes be mitigated, when an experienced tax attorney becomes involved at an early stage in the process. Conducting a Google search and handling the problem yourself is no strategy at all. Perhaps, it is time to stop digging.