You’re fighting the IRS, but you are uneasy and don’t know what to do. This all depends upon the type of tax and how long you have waited.
In general, fighting the IRS about income taxes and estate taxes is much easier than fighting the IRS about employment taxes.
In the case of income and estate taxes, the IRS will conduct an audit and then send you a letter asking you to agree to the results of the audit. If you do not agree to the results of the audit, you will have a chance to file an appeal (with the IRS) contesting the audit. You think that filing an appeal with the IRS sounds somewhat ridiculous, but it is actually quite useful. The IRS employee handling the appeal has much authority not to pursue the various proposed changes to your income and deductions (usually detrimental to you) than the IRS employee who conducted the audit.
You move forward with the appeal ,and the IRS completes the appeals process and asks you to agree or disagree to the results of the appeal. If you do not agree to the results of the appeal, a notice of deficiency (more commonly known as a 90 day letter) will be sent to you. The 90 day letter gives you 90 days from its date to file a petition with the U. S. Tax Court in Washington, D.C. to contest the results of the appeal (or, if you did not file an appeal, the results of the audit). The good thing about filing a petition with the U. S. Tax Court is that you do not have to pay the tax before filing your petition.
Unfortunately, you are not diligent and allow the 90 days to pass without filing a petition with the U. S. Tax Court. Upon the expiration of the 90 day period, the amount, as determined by the appeals office (or, in the audit, if you did not file an appeal) becomes a liability payable to the IRS.
You are not out of options, however. You can pay the tax and file a claim for refund. If your claim for refund is denied, you can file suit in federal district court for the district in which you reside, or in the United States Court of Federal Claims. It is important to remember, however, that if you litigate in the federal district court for the district in which you reside or in the United States Court of Federal Claims, you must pay the tax and sue for a refund. On the other hand, if you had been diligent and filed a petition with the U.S. Tax Court within the 90 day period, you would not have been required to pay the amount of the tax before litigating.
You are not sure, but you think you also have some potential liabilities for employment taxes. You were an officer of a corporation that is no longer in business, and it had a substantial amount of unpaid employment taxes at the time that it ceased operations. You were an officer of the corporation from the time of its inception until it ceased business operations. Your control of corporate disbursements by the corporation varied while the corporation was in business.
You have always heard about corporations providing limited liability and you wonder if it applies in this situation. While limited liability continues to apply, in this situation, federal tax law preempts state law. Under the Internal Revenue Code, control persons can be held personally liable for taxes withheld from the salaries of employees of corporations and other types of entities. This is commonly known as the 100 percent penalty even though it is not a penalty and this is not an accurate description of the provision.
You want to know whether this makes you personally liable for all of the unpaid taxes of your corporation. It does not. You can be held liable for the taxes withheld during the period that you were a control person, but you are not personally liable for the employer’s share of social security and medicare taxes. Furthermore, you are not personally liable for any penalties and interest owed by the corporation.
You mention that the IRS has not yet sought to recover any of these taxes from you, and you want to know the procedures the IRS must follow to recover these taxes. The IRS will send you a letter claiming that you are a control person and will seek to impose liability upon you for the amount of any withheld taxes, including income tax withholding, social security tax withholding and medicare tax withholding. You will then have an opportunity to file an appeal to contest the claims of the IRS. If you do not file an appeal or if the appeal is unsuccessful, the amount of liability asserted by the IRS becomes a liability payable to the IRS.
Even after there is a liability payable to the IRS, you still have an opportunity to contest your liability by paying the tax and suing for refund in federal district court in the district in which you reside or in the United States Court of Federal Claims.