In order to protect payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the Trust Fund Recovery Penalty (“TFRP”). These taxes are called trust fund taxes because the employer actually holds the employee’s money in trust until he or she makes a federal tax deposit in that amount. The TFRP may apply if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.
Who Can Be Responsible for the TFRP
The TFRP may be assessed against any person who:
- is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
- willfully fails to collect or pay them.
A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:
- an officer or an employee of a corporation,
- a member or employee of a partnership,
- a corporate director or shareholder,
- a member of a board of trustees of a nonprofit organization,
- another person with authority and control over funds to direct their disbursement, or
- another corporation.
For willfulness to exist, the responsible person:
- must have been, or should have been, aware of the outstanding taxes and
- either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).
Using available funds to pay other creditors when the business is unable to pay the employment taxes may be considered as an indication of willfulness.
You may be asked to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee’s function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid.
Figuring the TFRP Amount
The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:
- The unpaid income taxes withheld, plus
- The employee’s portion of the withheld FICA taxes.
For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.
Assessing the TFRP
If the IRS determines that you are a responsible person, they will provide you a letter stating that we plan to assess the TFRP against you. You have 60 days (75 days if this letter is addressed to you outside the United States) from the date of this letter to appeal our proposal. The letter will explain your appeal rights. If you do not respond to this letter, the IRS will assess the penalty against you and send you a Notice and Demand for Payment.
Once the IRS asserts the penalty, they can take collection action against your personal assets. For instance, they can file a federal tax lien or take levy or seizure action.
By: Igor S. Drabkin.
Igor S. Drabkin© 2008 All Rights Reserved.