IRS Trust Fund Recovery Penalty
The IRS Trust Fund Recovery Penalty (TFRP) is a significant penalty for unpaid trust fund taxes, including withheld income taxes and employee Social Security contributions. If you are facing a TFRP assessment, Pink Harbor, CPA is here to help you navigate the process, understand your trust fund tax liability, and protect your financial future. Trust our expertise to guide you through resolving these complex IRS matters with confidence.
What Is The IRS Trust Fund Recovery Penalty (TFRP)?
The IRS Trust Fund Recovery Penalty (TFRP) is a penalty assessed against individuals who are responsible for withholding and paying over certain taxes but fail to do so.
Specifically, this penalty is related to trust fund taxes, which include amounts withheld from employee wages, such as federal income taxes and Federal Insurance Contributions Act (FICA) taxes. Under Internal Revenue Code Section 6672(a), the penalty is equal to the total amount of the unpaid trust fund taxes.
Things You Need to Know
About The Trust Fund Recovery Penalty
Five Quick Facts About The Trust Fund Recovery Penalty (TFRP)
📝 What Is It? The Trust Fund Recovery Penalty (TFRP) is assessed by the IRS on individuals responsible for failing to remit withheld taxes like federal income tax and employee Social Security and Medicare taxes.
👤 Who Can Be Liable? Anyone with significant control over financial decisions, including officers, directors, or employees, can be held liable if they act willfully.
💰 Penalty Amount: The penalty is equal to the unpaid portion of the employee’s withheld taxes, such as income tax and Social Security contributions.
⏳ Statute of Limitations: The IRS has three years to assess the penalty and ten years to collect it from the date of assessment.
🤝 Multiple Responsible Parties: The IRS can assess multiple individuals for the same liability but cannot collect more than the total amount owed.
The IRS Process For Assessing The Trust Fund Recovery Penalty (TFRP):
📞 Initial Contact: The IRS starts off the process of assessing the penalty by contacting anyone they believe can be responsible for unpaid trust fund taxes. This can include anyone from the CEO down to the person who approves the payroll.
📋 Form 4180 Inquiry: The IRS will conduct interviews using Form 4180 to establish the individual’s role in being responsible for the business’s payroll obligations. These interviews are referred to as “4180 Interviews” due to the standard interview form the IRS uses.
💸 Ability To Pay Evaluation: The IRS is supposed to only assess the penalty against individuals they believe have the ability to pay the TFRP. Unfortunately, without proper representation, the IRS will often skip this step. A Form 433-A should be utilized to determine anyone’s ability to pay.
⚖️ Determination of Responsibility and Willfulness: The IRS must prove not only that the individual was responsible for withholding and paying taxes, but that the person also willfully failed to remit them.
📨 Letter 1153 Notification: Once the IRS determines responsibility, willfulness, and ability to pay, the IRS issues Letter 1153 to notify the individual of the proposed penalty and their right to appeal.
⏳ Appeal Opportunity: The individual has 60 days (75 days if outside the United States) to appeal the proposed penalty before it is finalized.
✅ Assessment: If no appeal is filed or the appeal is denied, the IRS formally assesses the penalty against the individual.
🎉 FUN FACT: Most TFRP assessments are made improperly because the party assessed does not have the ability to pay.
Impacts Of The Trust Fund Recovery Penalty (TFRP) On Individuals And Businesses:
💸 Financial Consequences: The penalty can create a huge financial burden. The IRS can also pursue levy action against the person’s personal assets to satisfy the TFRP.
💳 Credit Damage: A TFRP assessment can result in liens, which will impact an individual’s and business’s ability to obtain credit or secure financing.
🔄 Business Disruption: If the Trust Fund Recovery Penalty is assessed against an individual providing the business with operating capital, this can lead to operational disruptions as money previously supporting operating cash flow is diverted to pay down the TFRP.
⚖️ Personal Liability: Trust fund taxes create a personal liability that is not shielded from responsibility like other business debts in an LLC or Corporation.
😰 Emotional Stress: Immense stress and anxiety caused by the Trust Fund Recovery Penalty being assessed against key business employees can lead to a breakdown in the business’s management.
FREQUENTLY ASKED QUESTIONS
ABOUT THE TRUST FUND RECOVERY PENALTY
How Does The IRS Determine Responsibility And Willfulness For The TFRP?
The IRS determines responsibility and willfulness for the TFRP by evaluating an individual’s role and actions in a business.
Responsibility refers to whether the individual had the authority or control over financial decisions, including paying creditors or taxes. Willfulness is established if the individual knowingly failed to pay the taxes or acted with reckless disregard. According to Howard v. United States, 711 F.2d 729 (5th Cir. 1983), willfulness does not require intent to defraud but only a voluntary and conscious decision not to remit trust fund taxes.
What Taxes Are Considered Trust Fund Taxes?
Trust fund taxes are taxes withheld by businesses from employees’ paychecks on behalf of the government. These include federal income tax, and taxes on Social Security and Medicare.
The Internal Revenue Manual (IRM) 5.7.3.2 emphasizes that trust fund taxes are not the employer’s property but are held in trust for the United States.
How Is The Amount Of The TFRP Calculated?
The amount of the Trust Fund Recovery Penalty (TFRP) is calculated as the unpaid portion of the trust fund taxes.
The penalty does not apply to the employer’s share of these taxes. This calculation is outlined in IRC Section 6672(a) and is confirmed during the investigation process.
What Is The Process For Assessing The TFRP?
The process for assessing the Trust Fund Recovery Penalty (TFRP) involves an investigation by the IRS to identify responsible individuals and establish willfulness.
The IRS first interviews potentially responsible persons using Form 4180, “Report of Interview with Individual Relative to Trust Fund Recovery Penalty.” After gathering evidence, the IRS issues Letter 1153, which informs the individual of the proposed assessment and provides the opportunity to appeal through IRS Appeals.
Can Multiple Individuals Be Assessed The TFRP For The Same Liability?
Yes, multiple individuals can be assessed the Trust Fund Recovery Penalty (TFRP) for the same liability if the IRS determines that each person was responsible and acted willfully.
However, the government can only collect the full liability once, regardless of the number of individuals assessed. The joint and several liability principle is supported by Slodov v. United States, 436 U.S. 238 (1978).
Is There A Statute Of Limitations For Assessing And Collecting The TFRP?
Yes, there is a statute of limitations for assessing and collecting the Trust Fund Recovery Penalty (TFRP). Under IRC Section 6501(a), the IRS typically has three years from the date the tax return was filed (or should have been filed) to assess the penalty.
For collection, IRC Section 6502 provides a ten-year period from the date the TFRP was assessed.
Can The TFRP Be Abated Or Appealed?
Yes, the Trust Fund Recovery Penalty (TFRP) can be abated or appealed. An individual can request abatement if they believe the assessment was incorrect or if they were not responsible or willful.
Appeals can be filed through the IRS Independent Office of Appeals or contested in federal court.
IRC Section 6672(d) allows for a refund claim to be filed after partial payment of the penalty.
What Is The Trust Fund Recovery Penalty Statute Of Limitations?
The Trust Fund Recovery Penalty (TFRP) statute of limitations refers to the legal deadlines for the IRS to assess and collect the penalty.
Assessment must occur within three years per IRC Section 6501, and collection must be completed within ten years of the assessment date under IRC Section 6502.
What Is A Trust Fund Recovery Penalty Responsible Person? Who Can Be Held Liable For The TFRP?
A Trust Fund Recovery Penalty responsible person is someone who has control over the business’s financial affairs and decision-making, especially regarding the payment of taxes.
This person can include officers, directors, or employees. The IRM 5.7.3.3 defines responsibility broadly to encompass anyone who has the authority to direct the use of funds.
What Other Types of IRS Tax Resolution Options Are There?
Pink Harbor, CPA offers a variety of IRS tax resolution services designed to help you manage and resolve tax issues. Below are some of the most effective solutions available:
Settle your tax debt for less than the full amount owed, based on your financial situation.
Spread out your tax payments over time with an installment agreement, making it easier to pay off your debt.
Ensure compliance by filing past-due tax returns and addressing penalties for late filing.
Avoid liability for tax debt if your spouse is solely responsible for incorrect or fraudulent reporting.
Reclaim your share of a tax refund that was applied to your spouse’s past debts, such as child support or student loans.
Reduce or eliminate IRS penalties and interest if you can prove reasonable cause for late payments or filings.
Temporarily delay IRS collection activities if you are unable to pay your tax debt due to financial hardship.
What Other Types of IRS Tax Resolution Options Are There?
Pink Harbor, CPA offers a variety of IRS tax resolution services designed to help you manage and resolve tax issues. Below are some of the most effective solutions available:
Settle your tax debt for less than the full amount owed, based on your financial situation.
Spread out your tax payments over time with an installment agreement, making it easier to pay off your debt.
Ensure compliance by filing past-due tax returns and addressing penalties for late filing.
Avoid liability for tax debt if your spouse is solely responsible for incorrect or fraudulent reporting.
Reclaim your share of a tax refund that was applied to your spouse’s past debts, such as child support or student loans.
Reduce or eliminate IRS penalties and interest if you can prove reasonable cause for late payments or filings.
Temporarily delay IRS collection activities if you are unable to pay your tax debt due to financial hardship.
What is a Tax Levy?
An IRS levy is the most serious forms of IRS collection activity. This is when the IRS physically seizes your assets such as your car, boat, home, business interests and anything else that has value. The IRS will also levy your bank account and will drain every penny out of your account up to the amount of the tax owed. Fortunately for you, the IRS does not take immediate possession of your bank funds and they are held for a short period so that you may have one final opportunity to correct the situation. In the vast majority of these cases we can negotiate with the IRS to release that cash levy and give you an opportunity to work towards resolution. You only have days to act so it’s important that you call us today!