Once the trust fund recovery has been assessed against a responsible person, an important aspect to consider is the allocation of future payments to the government. Will they be credited towards the trust fund recovery penalty that has been assessed, or will they be credited towards non-trust fund taxes that responsible persons are not held personally liable for?
The Internal Revenue Code does not have any provisions that answer this question, however, the IRS has adopted the policy wherein taxpayers can direct the allocation of voluntary payments made to whatever liability is in their best interest. Thus, a responsible person who is liable for the trust fund recovery penalty can make a written designation directing voluntary tax payments to be applied to the trust fund portion of employment taxes.
If a written designation is not made, or if the designation is ambiguous, the IRS may allocate it however they like. The IRS may also allocate involuntary tax payments however it chooses. Involuntary tax payments include collection methods such as bank levies and judicial sales. The IRS does not have to be consistent in making these allocations, and they can be changed at a later date.
The IRS will make its allocation in order to maximize its revenue, so payments made from an employer’s account will typically be applied to non-trust fund taxes first. This allows the IRS to keep the trust fund recovery penalty available as a remedy for collecting unpaid employment taxes. In order to relieve the burden of personal liability arising out of the trust fund recovery penalty, responsible persons should include a written designation directing payment towards the penalty, when making voluntary payments towards unpaid employment taxes.
