Denver Manufacturing Company Megan Chair Of The Board Of Dir

Denver Manufacturing Companymegan Chair Of The Board Of Directors An

Denver Manufacturing Company is facing significant financial and legal challenges involving the misappropriation of payroll taxes and employee withholdings by Megan, the chair of the board, which has led to the company’s potential insolvency and shutdown. Megan used $550,000 of payroll taxes and employee income withheld from paychecks to pay a creditor threatening to cut off supplies. This act was willful and constitutes a serious violation of federal tax laws. As a tax professional, your role is to assess the potential IRS liabilities, advise the company’s stakeholders, and suggest appropriate remedial actions.

The focus of this memo is to analyze the tax assessments and penalties that the IRS may impose on Megan and others involved, and to outline the best strategies to assist Madison, Martin, and Washington, given these circumstances. The situation involves violations of federal employment tax laws, specifically the failure to deposit trust fund taxes, which is a severe offense under tax law. It is essential to understand the applicable statutes, potential penalties, and the avenues for mitigation and voluntary disclosure.

Analysis of IRS Tax and Penalties in the Context of Payroll Tax Misappropriation

The central legal concern here relates to the Trust Fund Recovery Penalty (TFRP), codified under 26 U.S.C. § 6672. This statute authorizes the IRS to impose active penalties on individuals responsible for collecting, accounting for, and depositing employment taxes. When an individual willfully fails to deposit these taxes, the IRS can assess a $50,000 penalty per quarter against responsible persons (IRS, 2019). Because Megan knowingly used payroll taxes for personal or business purposes rather than depositing them with the IRS, her actions are considered willful under the statute.

Assessment of Penalties for Megan

Given her willful misconduct, the IRS is likely to impose a penalty under 26 U.S.C. § 6672, which could total at least $550,000, the amount misappropriated, plus potential interest and additional penalties. The IRS can also pursue criminal charges for tax evasion, especially since Megan's actions appear intentional (IRS, 2019). The penalty applies directly to Megan because she was in a responsible position, and her conduct qualifies as willful.

Liability of Matthew and Other Responsible Persons

Ownership alone does not automatically render Matthew or others liable unless they also engaged in responsible or willful conduct. If evidence shows Matthew or other officers participated in or had knowledge of Megan’s actions, they can also be held liable under 26 U.S.C. § 6672. However, absent such evidence, the primary liability rests with Megan. Nonetheless, the IRS might scrutinize other responsible persons for any involvement or neglect, potentially leading to joint liability (South-Western Federal Taxation, 2019).

Potential for Civil and Criminal Penalties

Civil penalties include the TFRP, which can be assessed without criminal charges. Criminal penalties may encompass fines and imprisonment if Megan’s conduct is deemed criminal tax evasion. The severity depends on factors such as the amount involved, willfulness, and prior history (Murphy, 2016).

Strategies for Mitigating IRS Action and Assisting Stakeholders

As a tax professional, your approach should focus on voluntary disclosure, negotiation for penalty abatement, and guiding responsible persons toward compliance. Prompt disclosure of the misconduct and full cooperation with the IRS can potentially reduce penalties and facilitate more lenient treatment (Erdody, 2018).

Furthermore, providing legal and financial counsel to Madison, Martin, and Washington is vital. For Madison and Martin, understanding their non-responsibility, unless involved, can help shield them from liabilities. For Washington, the shareholder, the focus should be on safeguarding personal assets by demonstrating lack of involvement in misconduct.

Remedial Steps and Recommendations

- Encourage Megan to voluntarily disclose her misconduct to the IRS, which can lead to penalty mitigation under the IRS's voluntary disclosure programs.

- Engage in negotiations to establish a payment plan or settlement, especially if the company intends to resolve liabilities without liquidation.

- Advise the stakeholders on potential criminal exposure and recommend criminal defense strategies if charges are pursued.

- Support the company in restructuring or closing operations lawfully, ensuring compliance with tax obligations during wind-down procedures.

- Recommend implementing internal controls and compliance programs to prevent future violations.

Conclusion

In summary, the IRS is likely to assess Megan a significant trust fund recovery penalty of at least $550,000 for her willful misappropriation of payroll taxes, with possible additional interest and penalties. Other responsible persons may also face liabilities if involved or negligent. To assist Madison, Martin, and Washington effectively, the focus should be on voluntary disclosure, negotiating penalty reductions, and ensuring future compliance. A proactive and transparent approach, combined with legal advice, can mitigate the extent of IRS penalties and potential criminal liability, enabling the company to navigate through its financial distress lawfully.

References

• Department of the Treasury. (2019). IRS organization and top officials. Retrieved from https://www.irs.gov/about-irs
• South-Western Federal Taxation. (2019). Chapters 23 & 26.
• Erdody, L. (2018). Not-for-profit organizations brace for impact of tax bill: Much-higher standard deduction may discourage philanthropy. Indianapolis Business Journal, 38(48), 1,30.
• Murphy, M. (2016). Business practices that not-for-profits can't afford to overlook. Journal of Accountancy. Retrieved from https://www.journalofaccountancy.com
• IRS. (2019). Trust Fund Recovery Penalty. Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-recovery-penalty
• Thomson Reuters Checkpoint. (n.d.). Unrelated business taxable income, 26 U.S. Code § 512. Retrieved from https://checkpoint.thomsonreuters.com