Trust Fund Recovery Penalty Representation
“Trust Fund” taxes consist of income, social security, and Medicare taxes withheld from employee wages. The employer withholds these amounts from the employees’ wages and holds them “in trust” for payment to the government. Through this withholding, the employees contribute toward social security and Medicare and the withheld income taxes reported on their returns. The Internal Revenue Service gives the employees credit for payment of these taxes whether or not the employer actually remits the amounts to the IRS by making Federal Tax Deposits.
The IRS uses the Trust Fund Recovery Penalty (TFRP) to facilitate the collection of the “trust fund” taxes when the employer fails to remit the taxes to the IRS. The TFRP may be assessed against any individual who: (1) is responsible for collecting and/or paying withheld income and employment taxes and (2) willfully fails to collect or pay them.
A “responsible person” is typically a person with control over the use and disposition of a company’s assets or vested with the decision-making authority in connection with the payment of the company’s liabilities.
For willfulness to exist, the responsible person: (1) must have or should have been aware of the outstanding tax liability and (2) either intentionally disregarded the law or was plainly indifferent to its requirements. The use of available funds to pay other creditors instead of the IRS is an indication of willfulness.
Although TFRP is generally applicable to the owners and principal officers of small and/or closely held businesses, many IRS Revenue Officers assess the penalty against other individuals as well. Typically, IRS Revenue Officers look to all persons that had signature authority over the employer’s bank accounts during the time periods that the taxes were not paid. IRS Revenue Officers generally seek to assess the TFRP against as many persons as they can find. Sometimes they assert the TFRP even when legitimate defenses exist.
If the IRS determines that an individual is a responsible person that willfully failed to pay over the taxes, they will mail the individual a letter stating that they plan to assess the TFRP. The individual has 60 days from the date of the letter to appeal this IRS proposal. If the individual fails to respond to the letter, the IRS will assess the penalty against the individual and send a Notice and Demand for Payment. The penalty is equal in amount to the unpaid balance of the trust fund tax. This computation is based on: (1) the unpaid income taxes withheld and (2) the employee’s portion of the withheld FICA taxes.
Once the IRS asserts the penalty, it can initiate collection activity against the individual’s personal assets. Namely, the IRS can file a Federal Tax Lien or take levy or seizure action.
Experienced legal counsel can often make the difference and may be able to successfully defend individuals against IRS imposition of the Trust Fund Recovery Penalty.