IRS Trust Fund Recovery Penalty: What is it & and How to Resolve it

What are Trust Fund Taxes?

If you own a business, you are responsible for withholding the Medicare and Social Security contributions from their paychecks. You might also be responsible for withholding some income tax. Trust Fund Taxes are these withholding’s.

What is a Trust Fund Recovery Penalty?

The government is very interested in making sure it gets all of its money. Failing to make the payments for your employee’s trust fund taxes is going to get the IRS’s attention. The Trust Fund Recovery Penalty (TFRP) is a serious civil penalty. Failing to send the withheld money for your employee’s will net you a hefty penalty. The TFRP is one of the largest penalties the IRS charges; as a result, the IRS will be ruthless in collecting.

Does the Trust Fund Recovery Penalty affect only employers?

The IRS can levy anyone who collects or pays these taxes. This can include CEO’s, directors, third party payroll administrators, outside accountants, bookkeepers, and even employees because these taxes are supposed to be submitted on their behalf. Shareholders for corporations and board of trustees for nonprofits might also be held responsible.

How much is the penalty?

The TFRP is equal to the amount of unpaid trust fund taxes. So if held responsible, you have to pay double the trust fund taxes. With one employee, this can amount to a large sum of money based on how long the issue has persisted. With several employees, this sum can be crippling. This fails to even account for the additional interest and penalties that will accumulate should you fail to take action.

How does the IRS know who to come after?

How can the IRS determine who is responsible? If the IRS suspects that a company isn’t paying their trust fund taxes, an officer will start an investigation. This investigation will involve securing and reviewing documents and company information. The officer will comb through bank statements, canceled checks, lists of individuals who have passwords for online accounts and PIN’s for bank cards.

The officer follows the money trail to whomever is controlling the money, to where it is going, and to individuals with knowledge of this chain. Then, the officer will request an interview with the potentially responsible parties.

The interview starts with the IRS sending a summons to whoever they suspect is liable. These summons come in the form of a Form 4180 interview. The officer will ask you questions first to establish your identity and role in the structure of the company, before moving to more directed questions about the money trail they found.

Now the law states that the IRS can only hold someone liable for the TFRP if the person had a duty to collect and pay the taxes, and intentionally refused to. However in practice the IRS tends to be aggressive in imposing the penalty, even on persons who had knowledge but no control of the situation.

What is the Statue of Limitations for the Trust Fund Recovery Penalty?

The IRS has three years to assess a penalty. This three years starts on April 15 of the year after the taxes were due. If the IRS does not assess the penalty within these three years, it is illegal for them to investigate for that year. After the IRS does assess a penalty, they have up to ten years to collect that money.

How can a Trust Fund Recovery Penalty be settled?

Just like other forms of tax debt, the IRS has several options to settle. The first of these is to pay the amount owed in full. If payment in full is not an option based on your financial situation, you can negotiate for a payment plan or even to settle the debt with an offer in compromise. Above all, the most important thing to do is to establish an arrangement with the IRS as soon as possible. The IRS want’s to garnish your wages or levy you if they think they can recoup the money. You can buy yourself time to handle the issue just by starting to communicate with the IRS. What is important to note, is that these penalties cannot be discharged by declaring bankruptcy.

The TFRP is a serious issue; therefore, Detaxify implores taxpayers to seek adequate representation from a trusted tax professional before starting to negotiate with the IRS.