Assessing Trust Fund Recovery Penalties

The Trust Fund Recovery Penalty (hereafter TFRP) is the “trust fund” amount of payroll taxes imposed on a responsible person of a business. When a business withholds income from its employees to be paid to the government, the business is said to hold them “in trust” for the employee(s). Essentially, the business is doing the job of paying the taxes for its employees to the government and thus these monies are not the businesses at all. The trust fund includes withheld income, FICA, and Medicare (the latter two hereafter called social security taxes) taxes of the employee. The business itself matches the social security taxes of its employees, however, these are the business’ monies and not held in trust for the employees. Thus, a responsible person can only be assessed the TFRP for the employees portion of the taxes. Importantly, the responsible person is still liable even if the business is a corporation or they have filed for bankruptcy since the time of assessment. The penalty itself is not a calculation based on the amount of trust fund underpaid, it is the amount of the trust fund itself (however, penalties and interest do accumulate on the TFRP as well). The IRS treats the employee as paying their share of trust fund taxes even if the employer doesn’t pay them to the IRS. Since the employer, and more specifically the person in the business who is deemed responsible to pay the trust fund taxes, did not pay them, the government is losing money owed to them.

 

The amount of the trust fund tax liability due can be paid by the business, or any responsible person(s). The TFRP itself is imposed on the responsible person because it increases the government’s chances of getting the money due even if the business goes under. However, the amount of the trust fund need only be collected once. For example, if the business has the ability of pay the past due payroll taxes, they can pay and the responsible person will be off the hook for the TFRP. Furthermore, if two officers of a corporation are deemed responsible persons for the TFRP, both could pay part of the tax due and satisfy the debt. The IRS doesn’t care from whom they get the money as long as they get it.

 

When a business is behind on its payroll taxes and has not made an agreement with the IRS to pay them back, the IRS will begin to search for potentially responsible persons to assess the TFRP. An individual must be deemed responsible and willful for not paying the taxes for the given tax period past due. For example, an officer of a corporation may be responsible and willful one quarter of the year, but only responsible the next quarter and thus the penalty should only be imposed on them for the former quarter. Usually, a revenue agent will request an interview with all potentially responsible persons to help them decipher on who to impose the TFRP. If you receive a notice requesting an interview for the TRFP, it is probably a good time to contact a professional to assist with the tax problem.

 

The IRS uses Form 4180 to conduct the interview of potentially responsible persons. The IRS will want information such as: the duties of various officers of the business; who signed and paid liabilities (includes the IRS and other creditors); who had signature authority of business bank accounts; and if officers had to approve payments to various creditors (when an employee actually pays the creditors as part of their duties). Overall, they will use this information to assess responsibility and willfulness.Often times the Revenue Agent will want to conduct the interview at the place of business so they may look at the books and the overall function of the business. Once the IRS has interviewed all potentially responsible person and analyzed the situation, they will assess the TFRP on one or more people.

 

If you are contacted about an interview, first, it is smart to consider if you are indeed the responsible person. You need to decide if you are going to argue against the claim you are responsible or not. For example, if your articles of incorporation state you are the treasurer and you have final say on which creditors to pay, and your signature is on the payroll checks and bank cards you are possibly the person responsible. In this case, it may be a waste of time and effort to argue with the IRS as it may make them less willing to negotiate a payment plan for the TFRP, or worse, bring about criminal charges. You might also consider if any potential partners or others within or outside the business might be responsible. These people could help relieve you of some of the debt if they are responsible as well or they might try and assign all the blame on you in another scenario.

 

If you feel confident that the TFRP should not be assessed against you, then you will need to build a case to prove this to the IRS agent. A knowledgeable practitioner will help you prepare your case and negotiate with the Revenue Officer on your behalf. By law, an IRS agent cannot demand a meeting with the taxpayer themselves, and must negotiate with a practitioner, unless a summons is filed (which is rare). However, it often benefits the taxpayer to interview with their representative as it humanizes your case and can result in a more favorable outcome. It is a good idea to go over the Form 4180 with your representative, fill it out, and memorize the answers that will best serve your case before an interview. The practitioner should also bring an annotated copy of the Form 4180 to the interview to give to the agent as well. In certain situations, if you or your representative don’t want to talk to the IRS there are other wayss to go about giving them the information. Furthermore, the TFRP should not be assessed if the responsible party is financially incapable of paying. If this is the case, your representative should get necessary financial documentation from you and fill out a Form 433-F to give to the Revenue Agent showing your lack of ability to pay. Care should be taken to look over Form 4180 at the end of the interview and highlight any notes the IRS agent made incorrectly or left out before you sign the form. Always be truthful and forthcoming with the IRS!