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The Trust Fund Penalty and things you should know:

The TFRP is based on IRC Section 6672 and is used to: Facilitate the collection of tax and enhance voluntary compliance

Serve as an alternative means of collecting unpaid trust fund taxes when taxes are not fully collectible from the company/business that failed to pay the taxes

Policy Statement P–5–14 (IRM 1.2..14.1.3, Trust Fund Recovery Penalty Assessments) gives IRS the right to sent up the penalty.

IRM 5.17.7, Legal Reference Guide for Revenue Officers, Liability of Third Parties for Unpaid Employment Taxes

Type of Taxes that IRS can impose the Penalties for:

The TFRP is a penalty provided by IRC 6672 against any person required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities. The penalty is equal to the total amount of tax evaded, not collected, or not accounted for and paid over. Assessments of the TFRP are possible based on liabilities for the following tax forms:

941, Employer’s QUARTERLY Federal Tax Return

720, Quarterly Federal Excise Tax Return (see IRM 5.7.3.1.1)

CT-1, Employer’s Annual Railroad Retirement and Unemployment Return

943, Employer’s Annual Federal Tax Return for Agricultural Employees

1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

945, Annual Return of Withheld Federal Income Tax

944, Employer’s ANNUAL Federal Tax Return

8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests

8804, Annual Return for Partnership Withholding Tax (Section 1446)

The TFRP may be imposed, with respect to the taxes described in (3) above for:

Willful failure to collect tax

Willful failure to account for and pay over tax

Willful attempt in any manner to evade or defeat tax or the payment thereof

Although the TFRP is normally applied to employment tax returns for withheld income tax, withheld Social Security tax, or withheld Railroad Retirement Tax, the TFRP provided by IRC 6672 also applies to those excise taxes which are commonly referred to as “collected excise taxes” . Collected excise taxes (see IRM 5.7.3.1.1, TFRP for Collected Excise Taxes) are those which are imposed on persons other than the person who is required by law to collect the tax and pay it over to the Government (a collecting agent).

The revenue officer will explore the possibility of asserting the TFRP against the collecting agent’s responsible persons and will follow the same procedures for investigation and recommendation of the TFRP on employment taxes or collected excise taxes.

The full unpaid trust fund amount will be collected only once in a particular case, whether it is collected from the employer/collecting agent, from one or more of its responsible persons, or from a combination of the employer/collecting agent and one or more of its responsible persons.