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Trust Fund Recovery Penalties: What are they?

When a business is struggling with its cash flow, an owner, director, or even a payroll employee may be tempted to briefly dip into the trust fund taxes already collected and withheld from staff. But the IRS has a strong disincentive to this slipshod approach: the trust fund recovery penalty, or TFRP. 

Trust fund taxes are taxes earmarked for specific things, like Social Security taxes, railroad retirement taxes, or collected excise taxes. They come out of an employee’s paycheck, and the employer holds onto the money until it’s time to pay. When the employer fails to pay the IRS, the TFRP may come into play.

Who is responsible for the TFRP?

The IRS states that 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.”

The IRS is truly broad in its definition of “any person,” meaning almost anyone involved in the collection or payment of trust fund taxes may be held responsible for missed payments, including:  

  • An officer or 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 
  • Anyone with authority and control over funds to direct their disbursement
  • Another corporation or third party payer
  • Payroll Service Providers

Further, it doesn’t take a bad motive. Simply knowing about the outstanding taxes (or being in a position where one should know) and choosing to disregard the law is enough. Choosing to pay a creditor withheld income during a period of cash flow difficulties would be a clear indication of “willful” disregard. 

To determine responsibility, the IRS typically interviews parties involved, attempting to figure out what happened. To continue the example above, if an individual in the payroll department unknowingly spent money meant for tax purposes at the direction of his or her manager, that individual would likely not be held responsible.  

Individuals can be on hook, however. And because the TFRP is equal to the unpaid taxes, the financial consequences are potentially devastating. 

How does the IRS assess the TFRP? 

If the IRS pursues the TFRP, they must first provide a letter stating their intention. The recipient has 60 days to appeal, or 75 if they are outside of the country. The next step is a Notice and Demand for Payment. The IRS can then begin collections, issuing federal tax liens and pursuing personal assets. 

Some businesses or individuals may be able to set up installment agreements when repaying the taxes. Others may be able to make an offer in compromise that the IRS finds acceptable. 

The TFRP is different from criminal cases related to tax fraud or tax evasion, but it’s still a very serious matter. Employment taxes should be collected and paid to the IRS on time. If you’re a business owner, it’s a smart idea to have accounting systems in place, like separate accounts for deposits and operating funds, to help reduce the possible misuse of funds. 

Have Questions? Call the Experienced Tax Attorneys at Wiggam & Geer

If you are facing a TFRP or are facing penalties for late payroll tax payment, let Wiggam & Geer help you navigate the intricacies of appealing to the IRS. Contact metro Atlanta’s top tax and bankruptcy attorneys by giving us a call at (404) 609-1300.