Often, in times of economic hardship, businesses will borrow money from the trust account that contains taxes withheld from their employees. These are the funds withheld from an employee’s paycheck to cover Medicare, social security, and income tax. It’s the business’s responsibility to hold these funds from every paycheck and pay the IRS on time and in full. When a business doesn’t put the money they borrowed back and fails the pay the IRS these tax withholdings, the individual responsible for paying these taxes may be held accountable. As a result of this failure to pay, the IRS may issue what is called a trust fund recovery penalty.
Once an individual or corporation fails to pay their taxes before the payment due date, the taxes become delinquent. Usually, a penalty will be attached after the taxes become delinquent. The state tax commission has the power and authority to collect any and all taxes that become delinquent. When a company fails to pay income tax withholdings, those taxes become delinquent. Trust fund recovery penalties are a result of delinquent employee income taxes.
What is a Trust Fund Recovery Penalty?
Withholdings from wages are essentially held in a trust until a company pays the IRS. When an individual within a company willfully fails to pay these taxes, the IRS may impose Sec. 66729 (a) on said individual. This is known as the trust fund recovery penalty. The IRS won’t sit idly by while their money is being used as a short-term loan—this is the primary method by which the IRS gets what they’re owed. The trust fund penalty allows the IRS to collect unpaid tax withholdings from accounts and assets of the owners and operators of a business.
Why Does the IRS Target the Individual?
Even though corporations are typically set up to protect individuals within the company, they can’t protect an individual employee from a trust fund penalty. A “responsible person”, the target of a TRFP, can be categorized as “an officer or employee of a corporation, or a member of a partnership, who as such officer, employee, or member is under a duty to pay over taxes withheld” under Sec. 6671 (b). Someone who falls under the definition of a responsible person will typically be a higher up like a CFO rather than an employee in payroll or accounting—although individuals in payroll and accounting will likely be a part of the initial assessment. The potentially responsible person will typically have the decision-making ability to pay creditors and lenders before the payroll taxes that are owed. The IRS considers multiple factors when determining the responsible person, such as individual duties, authority over the businesses accounts, corporate position and status, and the ability to hire and fire employees. Determinants will vary from case to case based on the facts presented to the IRS during the first steps of the assessment.
Bank Signature Cards and Checks
One of the first things the IRS will do in pursuit of a trust fund penalty is issue a summons directly to the bank. The signatures on checks will reveal who is specifically handling the funds in the business accounts. However, signature cards and checks won’t reveal everything and can often be misleading. Individuals who are found on these checks will likely be the target of the investigation, but not always found at fault. The real targets of IRS trust fund penalties are the individuals who had the effective control and power over the decision to withhold the taxes from the IRS.
What Happens After a Responsible Person is Determined?
Once the responsible person is discovered, the IRS needs to determine if they willfully failed to pay taxes to the IRS. “Willfully” means the responsible person chose to pay other creditors instead of the IRS, even though the individual knew and or recklessly disregarded, that the business was not paying the IRS. If the responsible person chose to pay other creditors after a trust fund recovery penalty was implemented, they cannot be held accountable. The law only applies to an individual who chose to pay a creditor before an IRS trust fund penalty.
TFRP Assessment Process
The first step in an IRS officer’s TRFP investigation process is to determine which individuals were responsible and willful.
In addition to the bank documentation mentioned before, the IRS officer will also collect any receipts for debit and credit transactions. Gathering core documents from the company and the bank is how the IRS initially determines those who might be responsible.
The second step for the IRS is to conduct interviews with all of the individuals in question. These interviews are part of the evidence gathering process. Answers to these questions need to be accurate and forthcoming, otherwise further penalties may occur. An affidavit may be used to supplement the individual in question’s interview and assessment. Many of the questions asked by the officer can be answered by “yes” or “no”, and won’t leave room for explanation. Affidavits can be used to further explain answers to these questions and give the IRS officer a better understanding of the events.
The third step is to start the actual collection of the TFRP. This part of the process starts with Letter 1153(DO) and form 2751, Proposed Assessment of Trust Fund Recovery Penalty. This will notify the individual that there will be a demand for payment of the TFRP. Individuals who have been found responsible will have the ability to appeal within 60 days after receiving the letter.
The fourth step will be the actual payment on the TFRP. The IRS will typically allow for installment payments to be made to cover the cost of the delinquent taxes and the penalty. These payments will be taken from business assets from the non-trust fund portion of a company’s tax liabilities. Only after the liabilities have been satisfied will the IRS apply payments to the trust fund portion of the taxes. The most common resolution is an IRS installment plan where the penalties and taxes are paid over time.
Individuals Under Assessment
An individual who is at risk of assuming the position of the responsible person needs to seek out a trust fund recovery penalty abatement. A TFRP abatement shows either that the individual being assessed for the trust fund recovery penalty is not a responsible party, or did not willfully fail to pay the payroll taxes. Because the IRS tends to cast such a wide net during a TFRP investigation, many innocent individuals can end up being targets of the assessment. If you are the target of an IRS TFRP assessment, you should contact a tax professional or legal expert immediately. The IRS isn’t always accurate in who they ultimately find responsible and you don’t want to be caught in their crosshairs, especially when you’ve done nothing wrong.
Why Choose Community Tax for Your Trust Fund Penalty Needs?
Community Tax is a dedicated tax resource company that has assisted businesses and individuals for over a decade. We have resolved over 300 million in client tax debt and helped thousands find resolutions with the IRS. If you are seeking payroll tax relief, help with a trust fund penalty, or trust fund recovery penalty abatement, don’t hesitate to give us a call. Our experienced and trusted CPAs and tax attorneys are standing by to assist you.