Trust Fund Recovery Penalty (TFRP) IRC 6672 | JDKatz Attorneys at Law

TRUST FUND RECOVERY PENALTY ("TFRP")

What is a Trust Fund Recovery Penalty(TFRP)?

A Trust Fund Recovery Penalty i(hereafter "TFRP") is a collection mechanism utilized by the Internal Revenue Service to assess and collect taxes which arise when a business collects payroll taxes from its employees but then fails to pay those funds over to the United States. The penalty is typically associated with an individuals failure to pay over "payroll" and/or income taxes on behalf of a business.

Payroll taxes are the tax monies collected by a business from its employees withholding and may also refer to OASDI taxes (Social Security tax and Medicare tax). The OASDI taxes (Social Security/Medicare) represent a federal "social insurance fund" which provides benefits for elderly (retired), workers unemployed by reason of disability and their dependents. By contrast, Medicare provides medical benefits for the elderly (aged 65 and higher).

Who may be assessed a TFRP?

Individuals responsible for not depositing the trust fund monies to the IRS/US Treasury. These people may include-

The business owners;

Officers and Directors

Cashiers

Bookkeepers.

CFO/Accountants

How is a TFRP assessed?

Failing to properly file and pay a business's payroll taxes is a serious matter. Employees of businesses are subject to mandatory wage withholding. Once the funds are deemed withheld, the employee is generally given credit for the wage withholding against whatever tax liability they may have, regardless of whether the employer actually deposits the funds to the governments account.

The IRS typically assigns the collection of the TFRP to a revenue officer. The revenue officer is an IRS employee who will seek to collect the taxes for the government. The IRS twill typically attempt to have the business file all outstanding returns and collect a full payment from the business before it seeks collection from the employees. Where the business cannot full pay the liability, the IRS will begin to investigate the financial health of the business, and attempt to determine which corporate officers/employees/etc., participated in the decision not to pay the payroll taxes. The IRS may determine, where the business cannot continue to operate and remain current on its liabilities to shut down the business. (JDKatz First Rule of Holes-- When you are in a hole-stop digging.)

Should I obtain counsel if the IRS assigns a Revenue Officer to my matter?

Absolutely! Revenue Officers are specifically trained by the IRS to collect the maximum amount of money they can from any source, they deem legally permissible. With assessment of TFRP's the Revenue Officers are both investigator (prosecutor), finder of fact (Judge) and collector of the amount assessed (executioner). Unfortunately, while many individuals who are investigated aren't necessarily legally responsible for the tax-many wind up being assessed for the TFRP. These assessments are often caused by any number of factors:

1. Lack of Representation. The Taxpayer bill of rights allows you to be represented by counsel-don't waive this right. (In police custodial interrogations, a Miranda warning is required- the IRS is NOT required to notify you that your statements may be used against you.)

2. Stupidity. Taxpayer didn't understand the questions being asked of them by the revenue officer, or the implications of the answers.

3. Ambiguity- Taxpayer provides equivocal answers (maybe, can't remember, don't think so, etc.) to the Revenue officer, which don't clearly exonerate the taxpayer from liability.

4. Misperception. Taxpayer acts in a ministerial capacity for the business (such as an Accounts payable clerk who signs checks). Such individuals may not be able to determine who gets paid, but operate in a mechanical capacity (think: robo-signers in the mortgage debacle).

5. Negligence. Revenue Officers may be harried because they've waited to long to either begin their investigation, are overworked with their case load, or in some instances are up against a statute of limitations. IRS Tax managers will sometimes push Officers to make proposed or actual assessments in the absence of evidence, to prolong their statute of limitations on the penalty assessment.

If you aren't legally responsible, but say or act the wrong thing in the interview, the IRS may assess you anyway.

The IRS will interview different individuals of the corporation to identify who should be assessed the Trust Fund Recovery Penalty (TFRP). This is called a 4180 interview, for the form that is used to collect the responses. An individual is not responsible for a corporate payroll tax liability unless the IRS assesses a TFRP. This is also referred to as a 100% civil penalty. The TFRP is the amount equal to the tax that an employer withheld or should have withheld from employees' wages and failed to pay over to the IRS. It is important to note that payroll taxes and this penalty cannot be discharged in bankruptcy.

When the IRS tries to identify who should be assessed this penalty and made personally liable for the tax, the IRS looks to see who was responsible and willfully failed to pay the federal payroll taxes. The IRS is suppose to conduct a formal interview called a Form 4180 interview to determine if they are personally liable. The liable person is only responsible for the TFRP amount and not both the TFRP and the payroll tax amounts.

The IRS looks at many factors in determining whether someone is responsible for a payroll tax liability. However, one of the most important factors is control. Generally, the IRS considers anyone who has the authority to sign checks or the authority to operate the business on a day-to-day basis as someone who would have control over the business sufficient to assess a TFRP. Therefore, owners, officers, and executives may be considered responsible parties.

Generally, the IRS assesses a TFRP after a corporation has closed. Also, generally, the IRS has three years from the date of the tax assessment to assess the penalty against an individual. If the IRS does not assess a TFRP during the three years, the IRS is generally barred from making the assessment against an individual.