What is the Trust Fund Recovery Penalty?
Under Internal Revenue Code (“IRC” or the “Code”) § 6672, any person required to collect and pay over any tax imposed by the Code who fails to collect such tax or pay over such tax will be liable for a penalty equal to the total amount of the tax not collected or paid over. Several persons may be held jointly and severally liable. In essence, IRC § 6672(a) imposes a penalty on those responsible for paying such taxes and willfully failing to do so (the “Trust Fund Recovery Penalty” or “TFRP”).
According to IRC §§ 3101, 3111, and 3402, employers are generally required to withhold federal income taxes and Federal Income Contributions Act (“FICA”) taxes from their employees' wages, match the FICA withholding and remit the aggregate amount to the IRS quarterly. The FICA taxes, also known as "employment taxes," are credited towards future Social Security and Medicare benefits for employees. The employees' portion of the FICA taxes as well as any withheld federal income taxes are termed "trust fund taxes," as the employer is required by IRC § 6672 to hold the taxes "in trust" for the United States until the employer remits the trust fund taxes quarterly.
The Two Prongs of the TFRP: (1) A responsible person who (2) willfully fails to collect such tax or evade payment thereof
According to Internal Revenue Manual (“IRM”) § 8.25.1.3, the TFRP may be asserted against any person “responsible” for collecting, accounting for, and paying over trust fund tax who:
A. Willfully fails to collect such tax;
B. Fails to truthfully account for and pay over such tax; or
C. Willfully attempts in any manner to evade or defeat any such tax or the payment thereof.
Under IRC § 6671(b), a responsible person includes “an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty” to pay over taxes withheld.
Willfulness in the context of the TFRP is defined as “intentional, deliberate, voluntary, and knowing as distinguished from accidental.” According to IRM § 8.25.1.3.2, “willfulness” is the attitude of a responsible person who, with free will or choice, either intentionally disregards the law or is plainly indifferent to its requirements. Furthermore, the IRM instructs Appeals Officers to consider the following factors when determining willfulness:
Whether the responsible person had knowledge of a pattern of noncompliance at the time the delinquencies were accruing;
Whether the responsible person had received prior IRS notices indicating that employment tax returns had not been filed, were inaccurate, or that employment taxes had not been paid;
The actions the responsible party has taken to ensure its federal employment tax obligations have been met after becoming aware of the tax delinquencies; and
Whether fraud or deception was used to conceal the nonpayment of tax from detection by the responsible person.
Figuring the TFRP Amount
The TFRP amount is equal to the unpaid balance of the trust fund tax. The penalty calculation is based on both the unpaid income taxes withheld plus the employee’s portion of the withheld FICA taxes.
Assessing the TFRP
The TFRP investigation is conducted by a Revenue Officer from IRS Collections. The Revenue Officer will often request bank signature cards, canceled checks, and other business records to identify potentially responsible persons. The Revenue Officer will then examine the records and schedule interviews with any person the Revenue Officer determines may be responsible for failure to pay the trust fund taxes.
The purpose of the interview (commonly referred to as a “4180 interview”) is to work through a series of questions from IRS Form 4180. The form contains questions specifically designed to elicit responses that allow the Revenue Officer to determine (1) whether the individual was a responsible person and (2) whether the individual acted willfully.
The questions relating to whether the individual was a “responsible person” include:
- Whether the individual was responsible for setting financial policy for the company?
- Whether the individual authorized payments for bills or creditors?
- Whether the individual signed or submitted Forms 941 (payroll tax returns)?
- Whether the individual made payroll payments?
- Whether the individual was authorized to make payroll payments?
- Whether the individual knew that the taxes were not being paid?
- Whether the individual was involved in the company’s banking?
As it relates to “willfulness,” the Revenue Officer will be determining whether or not the individual was paying other creditors or satisfying other financial obligations. For example, during the time the delinquent employment taxes were increasing, was the individual paying the rent, mortgage, or other vendors? If so, the individual or any other person who did so may be considered a responsible person who willfully failed to pay the trust fund taxes.
If a potentially responsible person does not voluntarily agree to appear for the 4180 interview, the individual will be likely to receive a summons to appear for the interview. The individual will be told that they can seek representation by an attorney or any other IRS-authorized representative for the meeting. It is highly recommended that taxpayers obtain legal representation for a 4180 interview. A primary reason for that is the IRS’s recent increasing focus on trust fund tax cases for potential referral for criminal prosecution. See https://www.irs.gov/pub/irs-prior/p5084--2019.pdf.
Challenging a Proposed TFRP Assessment
At the conclusion of the 4180 interview, the Revenue Officer will decide whether to issue the individual a notice for potential TFRP liability. In an effort to increase the chance of collecting unpaid trust fund taxes, Revenue Officers will often include anyone in their TFRP determinations who may have been even marginally responsible. If the Revenue Officer determines the individual to be both responsible and willful, the Revenue Officer will mail Letter 1153(DO) and Form 2751, Proposed Assessment of Trust Fund Recovery Penalty.
To challenge the Revenue Officer’s determination if the individual receives Letter 1153(DO) and Form 2751, the individual has 60 days to protest the determination with the IRS Appeals Office. The protest should include any facts and legal authority that show that the individual was not a responsible person, and/or that the individual did not act willfully. Moreover, the protest should include any documentary evidence, such as any business records or affidavits supporting the individual’s case. One important fact to note about the TFRP is that the penalty is not dischargeable in bankruptcy.
Post-Assessment Appeals
After the TFRP has been assessed, the individual has a couple of options. The individual may file a request for abatement of the assessed tax, or a request for refund of any tax paid (as well as an abatement of any other taxes assessed for each disputed quarter). To request an abatement of the TFRP, the individual must submit a request for reconsideration via an Offer in Compromise – Doubt as to Liability (Form 656-L). When seeking a refund of the TFRP, the individual must first pay the tax attributable to one individual for each quarter at issue, followed by filing IRS Form 843. According to IRM § 8.25.1.7.4.2, if the amount cannot be accurately determined, the IRS may accept a representative amount. According to IRC § 6511(a), the taxpayer must pay the proper portion of tax, and within two years, must submit a separate Form 843 for each quarter in question to retain the option of judicial review. The proper portion of tax, often referred to as a “divisible amount” is equal to the withheld taxes attributable to a single employee for each payroll tax quarter covered by the TFRP. If the refund claim is denied, the individual can then dispute the IRS’s decision in the appropriate United States District Court, or the Court of Federal Claims.
If you or someone you know is aware of any unpaid employment taxes and are concerned about the potential consequences, both civil and criminal, contact The Wilson Firm today. With our knowledge and experience handling cases involving the Trust Fund Recovery Penalty, we will be able to help you in order to increase the likelihood of a successful outcome.
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