All employers withhold a portion of an employee’s wages to pay income taxes, Social Security, and Medicare taxes. This money, which is held ‘in trust,’ must be paid to the IRS on a weekly, semi-weekly or monthly schedule.
However, problems arise when a company uses the money for other purposes, such as paying vendors, utilities, or rent. In most cases, the employer fully intends to replace the trust funds that they borrowed in this manner, but during times of tighter cash flow, back taxes can accumulate faster than they can be repaid.
If the employer fails to pay these trust fund taxes on time, IRC 6672 permits the government to impose the Trust Fund Recovery Penalty (TFRP) to collect it. This liability is personal and assessed against a responsible person or persons (including employees). It is separate from, and in addition to, the original tax debt.(including employees) if the original tax debt is not paid in full.
Who Can Be Responsible for the Trust Fund Recovery Penalty?
The TFRP may be assessed against any individual who is responsible for collecting or paying income or employment taxes that have been withheld and willfully fails to do so.
The IRS defines a ‘responsible person’ as an individual or group who has the duty and authority to oversee the collection, accounting, and paying of trust fund taxes. Depending on how the business is set up, this could be one or more of the following:
- An employee
- Member of a partnership
- Officer of a corporation
- Corporate shareholder or director
- A member of a nonprofit organization’s board of trustees
- Payroll services provider
An individual’s responsibility hinges on whether or not he or she exercised independent judgment in managing the business’s finances. The employee is not responsible if his or her sole function is to pay the bills as directed by a superior, rather than determining which creditors to pay.
Wilfulness is determined to exist when this responsible party must have been (or at least should have been) aware of the obligation and either intentionally disregarded it or was simply indifferent. Evidence of willfulness includes using the money to pay other creditors instead of remitting the money to the IRS.
The IRS does not have to prove that the company representatives acted maliciously. Their actions are considered willful as long as they were aware of or should have known about the outstanding employment taxes but did not take appropriate action.
IRS Form 4180: the Trust Fund Recovery Penalty Interview
IRS Form 4180 is a questionnaire that the government uses for payroll tax debt cases. The interview is intended to determine who is responsible. The IRS representative, a Revenue Officer, is not only trying to learn if the interviewee is responsible, but who else in the organization might share liability.
If you are selected for an interview, you will first be asked for your name, Social Security number, phone number, and address. Next, the interviewer will ask you about your job title or your relationship with the company.
The interviewer works through a checklist of questions about your involvement with the company’s finances and payroll. You can expect questions such as these:
- What is your role in setting the company’s financial policy?
- Are you authorized to pay bills or creditors?
- Are you responsible for signing or sending payroll returns?
- Are you responsible for payroll payments?
- Are payroll payments authorized by you?
- Were you aware that taxes weren’t being paid?
- What role do you play in the company’s electronic banking?
- Do you use a third-party payroll company?
Depending on your situation, the agent may ask you more specific questions, such as if you have login information for online accounts or authorization to sign checks for the company. These questions help clarify your role in the company’s finances. If the company uses a third-party payroll provider, those representatives will be questioned too, to determine how the money is distributed to the provider and what its employees may have known about the situation. In most cases, it is not advisable to voluntarily participate in this process without the advice and assistance of a competent attorney.
Upon completion of the interview, the IRS will send you a proposed assessment (Letter 1153). You will have 60 days to appeal before the government assesses the civil penalty.
Business Trust Fund Penalty FAQS
How Much is the Trust Fund Recovery Penalty?
The TFRP amount equals the amount of tax that should have been paid under the FICA. If, for example, a single payroll period should have had $14,520 withheld for income tax, Social Security, and Medicare, the TFRP would be $14,520. When several payroll periods are involved, the amount of money to be collected can be significant.
The goal of the IRS is to get the trust fund debt paid – who the money comes from isn’t as important. TFRP liability is legally referred to as “joint and several.” That is, the IRS won’t hesitate to impose the penalty on as many individuals as possible. Each assessed responsible person is liable for the entire amount; and each assessed responsible person gets a credit for amounts paid by, or collected from, any other responsible person.If one assessed responsible person ends up paying the entire amount, she or he is entitled to seek contribution from any other responsible person What if I Disagree With the TFRP Assessment?
When a company disagrees with the findings of an IRS investigation, it may write a protest letter and send it directly to the IRS officer handling the case. This letter should include details about why the TFRP shouldn’t be assessed and explain why the officer’s conclusions were inaccurate.
The IRS can rescind Letter 1153 if they agree with the protest letter, although this doesn’t happen in most cases. Instead, the letter will be forwarded to an appeals officer who will review your argument and make a decision. If the matter cannot be resolved during the appeal process, the next step is the U.S. District Court. It’s a complicated process that is best undertaken with help from a Minnesota tax defense lawyer.
What if I Can’t Pay the Trust Fund Recovery Penalty?
You have several options if you cannot immediately pay the full penalty amount:
- Installment Agreement: A repayment plan is set up for the business and all responsible parties. You can also try to negotiate a link and defer plan, which means that the business is solely responsible for paying. The only time you need to pay personally is if the business defaults.
- Offer in Compromise: Offers in Compromise allow you and the IRS to settle your tax debt for a lower amount based on a calculation of your ability to pay after reasonable expenses are met.
- Currently Non-Collectible (CNC) Status: CNC status is available if you can’t pay your tax debt and meet your necessary expenses. However, the IRS can still garnish your tax refunds until you can pay and file a Notice of Federal Tax Lien.
A tax lawyer can help you identify and seek the relief option that makes the most sense for your circumstances.
Questions About the Trust Fund Recovery Penalty? Speak to a Minnesota Tax Defense Lawyer!
At Pridgeon & Zoss, PLLC, we understand how a penalty from the IRS can cause stress and disruption in your life. The government will review your personal and business assets, contact your bank and employees, and basically intrude on every aspect of your life. Protecting your interests requires a strong defense, and our lawyers have years of experience protecting client rights in tax controversies.
To schedule a consultation to discuss your case, please contact us today. We serve clients throughout Minnesota and western Wisconsin from our offices in Edina and Roseville and look forward to assisting you with your TFRP situation.