IRS Code Section 6672 imposes personal liability for unpaid trust fund taxes and willfully fails to do so.

The Trust Fund Recovery Penalty Guide

Q: What is an IRS Trust Fund?

Unpaid payroll taxes are referred to by the IRS as “trust fund taxes.” A trust fund tax is money withheld from an employee’s wages (income tax, Social Security, and Medicare taxes) that is held by an employer in trust and then paid to the government.

Q: How much should I offer in compromise to the IRS?

It depends on many factors. It is recommended you seek expert advice from a tax consultant or tax counsel.

Q: How do you get an offer in compromise approval?

The IRS will evaluate your offer and consider whether the offer is appropriate based on your true ability to pay. An appropriate offer accepted by the IRS will be based on your assets, income, expenses, and future earning potential.

CIVIL PENALTY/TRUST FUND RECOVERY PENALTY

The Trust Fund Recovery Penalty (TFRP) is a civil penalty that is personally assessed against individuals who failed to pay their payroll taxes to the IRS. Under IRS, Sec 6672(a), the IRS can impose this penalty on any individual responsible for paying a company’s payroll taxes and failing to do so. Under the event that the TFRP is assessed, the IRS will audit all parties accountable for the unpaid payroll taxes. Once each individual has been personally assessed, the IRS can legally pursue collection action, file tax liens, and even initiate a seizure against said individual.

Why Does The Trust Fund Recovery Penalty Exist?

You may be asking “why does this penalty exist?” Well, the IRS’ logic for imposing the TFRP is that the individual responsible for these taxes was holding the funds in trust for the government. Therefore, the IRS will take action against individuals who have failed to manage their business and government duties. Although the business may protect employees from personal liability, the Trust Fund Recovery Penalty can still hold an individual liable if their business fails to remit the mandatory funds.

Who Is Affected By The Trust Fund Recovery Penalty?

It may seem logical that the IRS would simply assess the business itself with the Trust Fund Recovery Penalty for unpaid business taxes. However, the TFRP specifically penalizes the employee who failed to ensure the proper taxes were paid for said company. In order to determine the person who must be penalized, the IRS must determine who is “responsible” for the unpaid payroll taxes and if they neglected said taxes “willingly.” These two factors ultimately contribute to the IRS’ TFRP assessment on individuals. The IRS Notice 784 is a basic guideline for individuals who believe they may be liable for unpaid federal taxes.

Who is Responsible for Control of Trust Fund Tax Payments?

IRC section 6671(b) defines a “responsible person” as a business employee who is responsible for collecting and/ or paying the necessary employment taxes. The IRS takes into consideration the individual’s company status and job duties; the party audited for the TFRP must have a substantial amount of power over the business’ finances. More specifically, the “responsible” party must be a person or party that has the ability to manage and control the collecting, accounting, and paying of trust fund taxes.

Examples of a “responsible” party include, but are not limited to:

An employee or officer of a corporation
An employee or member of a partnership
A third party payer or alternative corporation
A person with the authority and power to control the disbursement of funds.
Payroll Service Providers (PSP) or Professional Employer Organizations (PEO)

Willfulness of Responsible Party

After careful deliberation, the IRS will then investigate the “responsible” party in order to determine their “willfulness.” The primary factor in determining “willfulness” is whether the responsible party’s decision to not pay the required taxes was conscientious. Additionally, the IRS does not take into consideration if the responsible party’s decision was made with malicious intent. Simply put, the responsible individual will be held liable for the missing taxes if they are found guilty of doing so willfully and knowingly.

Examples of “willfulness” may include:

Awareness of outstanding taxes
Intentionally disregarding the law
Indifference to the law
A person with the authority and power to control the disbursement of funds.
Using available funds to pay creditors while unable to pay business employment taxes

How Lifeback Tax Resolves Trust Fund Recovery Penalties

Individuals faced with the Trust Fund Recovery Penalty face hefty fees as well as the burden of dealing with the IRS. An IRS Revenue Officer will be assigned to collect the business’ unpaid taxes as well as investigate the responsible party. The TFRP is a headache to deal with, we know!

Lifeback Tax has settled and negotiated TFRP cases for plenty of clients. Our expert staff of Enrolled Agents, CPAs, attorneys and case managers have dealt with the multi-faceted tax code for years. We work with both businesses and individuals facing the intimidating Trust Fund Recovery Penalty. Our team understands that the process to resolving the TFRP can be grueling. In order to successfully resolve the TFRP, we exhaust every option possible. Our in-depth knowledge of the tax law and IRS procedures make us confident in knowing we can help our clients resolve the TFRP once and for all!