Trust Fund Penalty Representation
The trust fund recovery penalty allows the IRS to collect any unpaid payroll withholding taxes from the assets of the owners and operators of the business. These taxes are called trust fund taxes because businesses are actually holding an employee’s money in trust until they make a federal tax deposit in that amount. The TFRP may apply to a business owner 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. If this penalty gets assessed, it is advisable to retain trust fund penalty representation immediately.
It penalizes those who had control over the decision to divert the payroll money from the IRS to other creditors of the business.
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,
- Another corporation or third-party payer,
- Payroll Service Providers (PSP) or responsible parties within a PSP,
- Professional Employer Organizations (PEO) or responsible parties within a PEO, or
- Responsible parties within the common law employer (client of PSP/PEO).
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 is an indication of willfulness.
If this applies to you, you may be asked to complete an interview in order to determine the full scope of your duties and responsibilities. Make sure you have someone to provide trust fund penalty representation during that interview with the IRS. 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. IRS Notice 784, Could You Be Personally Liable for Certain Unpaid Federal Taxes?, contains additional information regarding the TFRP.
The trust fund recovery penalty is equal to the income taxes, social security taxes, and Medicare taxes withheld from employee paychecks. This penalty is also known as the 100% penalty since the amount of the penalty is equal to the unpaid balance of the trust fund tax. This is a heavy-duty fine. Having trust fund penalty representation may be able to keep this from happening to you.
The IRS collection agent will want to do an in-person interview to determine responsibility for the trust fund penalty. It is best to make sure you are prepared for this in advance and make sure you have the best trust fund penalty representation that you can. If the IRS determines that you are a responsible person, they will provide you a letter stating that they 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 their proposal. If you do not respond to their letter, they 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. Trust fund penalty representation is always advised when dealing with these issues.
You can avoid the TFRP by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required. Make your tax deposits and payments on time.