IRS Trust Fund Penalty, What You Need to Know – Tax Defense, Former IRS
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The IRS Trust Fund Recovery Penalty, What you Need to Know
To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the Trust Fund Penalty.
These taxes are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount.
In reality, they are not a tax.
The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business.
The business does not have to have stopped operating in order for the TFRP to be assessed.
Who Can Be Responsible for the Trust Fund Penalty
The TFRP may be assessed against any person who:
1. Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
2.Willfully fails to collect or pay them.
A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.
This person ma/can be:
- An officer or an employee of a corporation,
- A member or employee of a partnership,
- A corporate director or shareholder,
- A member of a board of trustees of a nonprofit organization,
- Another person with authority and control over funds to direct their disbursement,
- Another corporation or third party payer,
- Payroll Service Providers (PSP) ore responsible parties within a PSP
- Professional Employer Organizations (PEO) or
- Responsible parties within a PEO, or
- Responsible parties within the common law employer (client of PSP/PEO).
For willfulness to exist, the responsible person:
- Must have been, or should have been, aware of the outstanding taxes and
- Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).
- Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.
How IRS proceeds
You may be asked by the IRS to complete an interview in order to determine the full scope of your duties and responsibilities. See Form 4180 on our website.
Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business.
An employee is not a responsible person if the employee’s function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid.
Notice 784, Could You Be Personally Liable for Certain Unpaid Federal Taxes?, contains additional information regarding the TFRP.
How to Figure the TFRP Amount
The amount of the penalty is equal to the unpaid balance of the trust fund tax.
The penalty is computed based on:
- The unpaid income taxes withheld, plus
- The employee’s portion of the withheld FICA taxes.
For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.
Assessing the TFRP
Determination
If the IRS determines that you are a responsible person, we will provide you a letter stating that we plan to assess the TFRP against you.
You have 60 days (75 days if this letter is addressed to you outside the United States) from the date of this letter to appeal our proposal.
The letter will explain your appeal rights. Refer to Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don’t Agree (PDF), for a clear outline of the appeals process.
If you do not respond to our letter, we will assess the penalty against you and send you a Notice and Demand for Payment.
Big Caution
Once the IRS asserts the penalty, IRS can and will take collection action against your personal assets. For instance, we can file a federal tax lien or take levy or seizure action.
Call us today for a free initial tax consultation. Our firm defends against the trust fund penalties.