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Trust Fund Recovery Penalty
What is a Trust Fund Recovery Penalty (TFRP)?
A Trust Fund Recovery Penalty (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 individual’s failure to pay over “payroll” and/or income taxes on behalf of a business. If you find yourself facing a TFRP, then contact JDKatz: Attorneys at Law today, we’ll provide you with the comprehensive tax advice and defense you need.
What are payroll taxes?
Payroll taxes are the 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. Medicare, on the other hand, 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
How is a TFRP assessed?
Failing to properly file and pay a business’ 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 government’s 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 will 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 to shut down the business when the business cannot continue to operate and remain current on its liabilities. (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 consist of the 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. Bringing in a qualified tax attorney during this process can help to mitigate the risks and damages done by a TFRP. These assessments are often caused by any number of factors:
- 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. However, the IRS is NOT required to notify you that your statements may be used against you.)
- Stupidity: Taxpayer didn’t understand the questions being asked of them by the Revenue Officer, or the implications of the answers. In either case, ignorance of the law is no excuse for not following it, per our Federal viewpoint on crimes.
- 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.
- 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).
- Negligence: Revenue Officers may be hurried because they’ve either waited too long to begin their investigation, are overworked with their caseload, 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 do the wrong thing in an interview, the IRS may assess you anyway.
In an attempt to make an accurate claim against a corporation, The IRS will conduct a 4180 interview (named for its associated form), designed to find the individual responsible for the tax evasion measures and liability. This occurs only in cases for which the IRS is assessing a TFRP, and will be a 100 percent civil penalty to the person who holds the responsibility for corporate payroll tax liability. The TFRP is assessed for the amount that the company withheld from their employee’s paychecks and didn’t hand over to the IRS, and the penalty assigned to such a charge can’t be avoided through bankruptcy.
During a 4180 interview, the goal of the IRS is to discover who, if anyone, willfully refused to pay the company’s federal payroll tax for the given year. When the IRS finds the responsible party, they charge them for the amount of the TFRP, not the original payroll tax amounts.
There are many factors that go into the IRS’s decision to hold a person responsible for failing to pay corporate payroll taxes. It will generally boil down to who had the most control over the process, so they will look into those who have the authority over the daily business operations, particularly those who have control over the checkbook. Because of this, executives, owners, and other such officers of the business can be under consideration for tax penalties.
Generally, the IRS assesses a TFRP after a corporation has closed. Also, in general, 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 due to their statute of limitations.
If you are concerned about your personal tax liability or represent a business being assessed for a Trust Fund Recovery Penalty, our team of qualified tax lawyers can help. JDKatz is proud to be your trusted team of tax attorneys for Maryland, providing comprehensive services that work to optimize the outcomes for our clients. Contact us today to get started.