If you own a business with one or more employees and you are not able to pay all taxes you owe for employing them, the “Trust Fund Recovery Penalty” (TFRP) may apply to you.
The term “trust fund” has different meanings in different contexts. In the context of employment taxes, trust fund taxes refer to the funds withheld from employees to pay federal withholding taxes and one-half of FICA (the funds paid into Social Security and Medicare).
Every business must pay and file payroll taxes on a quarterly basis. If your business has not paid all or a portion of these taxes, then you may be subject to a Section 6672 assessment. Section 6672 of the Internal Revenue Code allows the IRS to collect all unpaid taxes that should have been paid into the trust fund.
In some cases, business are attempting to “cook the books” to see if they can get away without making their payments. In other cases, the process is simply being mismanaged by a business. But, in most cases, a business is forced into a situation where they have to pay trust fund taxes or pay off creditors. Instead of paying off trust fund taxes, the business chooses to remain operational and pay off creditors.
Unfortunately, individuals who make this choice can be held personally liable for their actions. If the IRS notes any shortage in the amounts that were supposed to be paid into the trust fund, it can assess multiple actions against several different people for a single time period. The purpose of this is to allow all accused persons to determine among themselves how much each must pay into the trust fund.
However, the IRS cannot collect more than you owe the trust fund. And, if you overpay, you are entitled to a refund. Generally, the IRS will follow through on a Section 6672 assessment when:
- The individual within an organization had the authority to make financial decisions related to trust fund taxes
- The individual willfully failed to collect the taxes, or decided to make other payments first
“Willfullness” has been defined by the outcomes of previous cases and the Internal Revenue Manual. Basically, you are acting willfully if you make a “voluntary, conscious, and intentional decision” not to pay withheld funds to the IRS.
The IRS has three years during which it can enforce the Trust Fund Recovery Penalty against you. You may also face civil penalty assessments. If you are not cooperative in resolving any amounts you owe to the trust fund, an IRS revenue officer can examine your business’s tax returns, bank statements, corporate minutes and all other financial and organizational documents to establish who was responsible for the shortage in trust fund payments. They may also conduct an interview anyone of interest using Form 4180, which helps them collect the necessary statements to support a Section 6672 assessment.
If the revenue officer’s manager approves his or her recommendation of a Trust Fund Recovery Penalty, you are issued a 60-day letter notifying you of the proposed assessments. You are also given the right to appeal this decision.
What Do You Do If You are Facing Trust Fund Recovery Penalties?
If you find yourself in this situation, ask for help from an experienced tax attorney. A skilled IRS attorney can help you take the best actions to keep your business operating and in good standing with the IRS. The sooner you act, the better, because it becomes increasingly difficult to successfully resolve these situations the further you get into them.