Case Study: IRS Collection Actions Against T.H. What’s Up LLC

Created By: Martha De la chaussee, former IRS Collection Revenue Officer, trainer, mentor, speaker and author of IRS audits and collection subjects.

Background

T.H. What’s Up LLC, a wholesale distributor of licensed stuffed animals and display products, accrued $325,789 in unpaid payroll taxes for periods spanning 2023 through the third quarter of 2025. Despite repeated IRS notices—including Letter 1058 (Final Notice of Intent to Levy with CDP rights)—the company failed to request a Collection Due Process (CDP) hearing.

IRS Revenue Officer (RO) Mrs. Kelly was assigned to the case. She issued a demand for payment and arranged an appointment with Mrs. Cumbersome, the LLC’s Member/President.

Initial Contact and Demand

During the appointment, RO Kelly demanded full payment of the outstanding payroll tax debt. Mrs. Cumbersome explained the LLC could not pay due to economic hardships.

• RO Action: Provided with a 10-day deadline to submit financial documentation proving inability to pay.
• Warning: If no response, levies would be issued against bank accounts, accounts receivable, and even landlord deposits. A request for consent to seize LLC assets follows.
• Compliance Requirement: The LLC was required to resume making current federal tax deposits (FTDs) for the third quarter of 2025 before any consideration of relief.

Trust Fund Recovery Penalty (TFRP) Investigation

Simultaneously, RO Kelly began investigating the Trust Fund Recovery Penalty (TFRP) for $124,563, representing the trust fund portion of the payroll taxes.

• Mrs. Cumbersome was interviewed regarding responsibility and willfulness.
• A partially completed Form 433-A revealed she had $225,000 equity in rental properties, though no equity in her personal residence.
• RO Action: Demanded that Mrs. Cumbersome attempt to secure loans against the rental properties or face personal assessment of the TFRP. Loan applications and denial letters would be required if financing could not be secured.

Escalation of Collection

The LLC failed to submit the required Form 433-B and backup financials. Deadlines passed without communication.

• IRS Action: Levies were issued on both LLC bank accounts and accounts receivable.
• Result: $50,000 recovered from bank accounts.
• Despite levies, no current tax deposits were made.
• RO Kelly returned to the business and demanded consent to seize assets; Mrs. Cumbersome refused.

45 days later, accounts receivable yielded an additional $100,000.

Warnings of Criminal Exposure

Because the LLC continued to pyramid payroll tax liabilities by failing to pay third quarter 2025 deposits, RO Kelly issued Letter 903—a warning that payroll fraud and pyramiding could lead to criminal prosecution.

• Outstanding debt after levy proceeds: $234,568.
• Additional levies were re-issued, though limited to one-time attachments.
• A writ of entry was obtained for seizure of business assets.

Planned Seizure

The LLC’s assets included:

• Licensed stuffed animal inventory
• Warehouse fixtures and racks
• Three delivery trucks

Estimated fair market value: $450,000.

Seizure and auction were scheduled, with notices of seizure, notice of sale, and minimum bid worksheet delivered.

Bankruptcy Filing

Before the seizure could occur, T.H. What’s Up LLC filed for Chapter 11 bankruptcy protection.

• IRS Response: The RO had to suspend seizure activity and notify the Bankruptcy Advisory Unit. Levied funds collected prior to the filing were held pending stipulations or court orders.
• The TFRP investigation proceeded, with a proposed assessment against Mrs. Cumbersome within six months.

Bankruptcy Resolution

The Bankruptcy Court approved a Chapter 11 repayment plan:

• Installment agreement for IRS debt.
• Condition: The LLC must stay current with all future filing and payment obligations.
• If the LLC defaults, IRS Collection Advisory (via Area Counsel) can request dismissal of the bankruptcy.

Lessons and Observations

1. IRS Enforcement Is Escalatory: From demand to levies, to TFRP interviews, to asset seizure—enforcement intensified as non-compliance continued.
2. Trust Fund Recovery Penalty Pressure: Targeting Mrs. Cumbersome personally created leverage, forcing her to consider using personal assets to cover trust fund taxes.
3. Bankruptcy as a Last Resort: Chapter 11 temporarily halted seizure but placed the LLC under strict compliance conditions, monitored by the Bankruptcy Court and IRS Advisory.
4. Pyramiding Risk: The issuance of Letter 903 highlighted that continued failure to pay FTDs can escalate cases from civil enforcement to criminal investigation.

Conclusion

This case illustrates how quickly an IRS payroll tax debt can escalate to levies, seizures, and personal liability assessments under the TFRP. The LLC’s failure to stay current with payroll deposits compounded its exposure. Ultimately, Chapter 11 bankruptcy provided temporary relief but imposed court-mandated compliance and kept both the business and Mrs. Cumbersome under IRS scrutiny for years to come.