Trust Fund Recovery Defense

The Trust Fund Recovery Penalty (TFRP) is a fine charged for unpaid trust fund taxes and is equal to a portion of the business’ unpaid payroll taxes. It can be a hefty fine that the IRS aggressively attempts to collect, and they have three years to do so.

Trust fund taxes include Federal income taxes and the employee portion of FICA taxes (Social Security and Medicare). An employer is responsible for monthly payment to the IRS, as well as quarterly reports.

Non-trust fund taxes are the taxes that are not required to be put into a trust fund by the employer. They include:

• The employer’s portion of Medicare
• Employer’s portion of Social Security taxes
• Unemployment taxes

On the other hand, trust fund taxes include:

• The employee’s portion of FICA taxes
• Withheld income taxes

The IRS states, “the TFRP is a penalty against any responsible person required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities.” The IRS identifies one or more individuals who are responsible for collecting and/or paying withheld income and employment taxes, and willfully does not collect or pay. A responsible person may be:

• An officer or an employee
• A board member
• Another person with authority and control over funds
• A payroll service
• A third party payer

The responsible person must also “willfully fail” to collect or pay. This means the responsible person should have been aware of the unpaid employment taxes and either purposefully chose to ignore the law or did not care to adhere to the requirements. If the IRS thinks you may be liable, the agency may request a Form 4180 interview.

When a TFRP is set in motion by the IRS, they will schedule a Trust Fund Recovery Interview with anyone in your organization who might be responsible for paying the TFRP. When you are interviewed, the IRS Revenue Officer will ask you questions such as:

• When did you become aware of the unpaid taxes?
• Who handles the IRS paperwork?
• What did you do when you discovered there were unpaid taxes?

Ultimately, the office is looking for the answer to the question, “Who had the ability to sign checks and pay the taxes, but didn’t?” If that person is you, you could be on the hook for the TFRP.

The IRS can seize your business’s assets if you don’t pay the TFRP or other business taxes or penalties. The IRS can change the locks to seize your business property or even your leasehold if it has value. These actions can effectively lead to the closure of your business

In order to avoid the TFRP, you need to make sure that the funds you subtract from employee wages go directly into a separate trust fund account and remain there until you pay them over to the government when due. It is not worth the risk to “borrow” from the trust fund account. If you are unable to pay the full amount of payroll taxes due, you must specifically designate your partial payment from the trust fund account to be applied toward the trust fund liability.

However, if a corporation fails to do so, the responsibility to pay the taxes can be pinned on any responsible individual within a company, making that person personally liable for their employer’s unpaid taxes. The IRS assesses the Trust Fund Recovery Penalty against those individuals in these situations. The IRS uses Form 4180 interviews to determine responsibility for these taxes.

The Wiggam Law defense for a potential Trust Fund Recovery Penalty involves collecting information about your role within the organization, as well as the roles of others, to prove that someone else is responsible and willful. Even if you are a responsible party who willfully did not pay the payroll taxes, it can sometimes be argued that you should not be charged the penalty if you are uncollectible.

When an IRS revenue officer decides to assess the penalty against an individual, they will generally send Letter 1153. Then, you have sixty days to file a protest to dispute the officer’s determination. You are then entitled to a hearing with the IRS appeals office where an independent IRS employee will review your case.

Our tax attorneys have the professional knowledge and skill to represent you during your Trust Fund Recovery Investigation, and negotiate for your unique situation. We can also help you deal with other business tax issues including fines for failure to file forms required under the Affordable Care Act.