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Archive for Trust Fund Recovery Penalty

How To Designate An IRS Employment Tax Payment

How To Designate An IRS Employment Tax Payment

When a taxpayer makes a voluntary payment to the IRS, the taxpayer has the option to designate the application of the payment to certain periods and/or taxes.  For example, if a corporation owes federal employment taxes and the corporation desires to make a partial payment towards the past due employment taxes, the corporation or an authorized individual may designate the payment towards the “trust fund portion” of employment taxes due.  In this manner, the payment reduces not only the employment taxes owed, but also the potential liability for persons who may have been liable or may be subsequently found to be liable for so-called trust fund recovery penalties (“TFRPs”) under Section 6672 of the Code.

On July 23, 2021, IRS Chief Counsel released a Chief Counsel Advice Memorandum on this issue, and it serves as an important reminder to tax professionals and taxpayers regarding the option to designate payments and also the requirements taxpayers must follow to do so.

Trust Fund Recovery Penalties Generally

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“Extreme Personal Hardship” Doesn’t Excuse Trust Fund Recovery Penalties

"Extreme Personal Hardship” Doesn’t Excuse Trust Fund Recovery Penalties

Trust Fund Recovery Penalties (or TFRPs) refer to the tax penalties assessed against the responsible person(s) of a business (e.g., directors, officers, etc.) that failed to collect, account for, or pay over taxes on behalf of its employees. As a result, the failure of a business to pay over employment taxes does not necessarily stop with the business. Directors and officers may be personally liable for their actions (or inactions) with respect to the business’ employment taxes. In a recent decision by the Fifth Circuit Court of Appeals, the Court affirmed the lower court’s determination that the president and owner of certain businesses was personally responsible for trust fund recovery penalties. Further, while the taxpayer experienced “extreme personal hardship,” as well as business difficulties, those circumstances did not excuse his underlying tax responsibilities.

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Taxpayer Wins Major Victory At Pleadings Stage On Trust Fund Recovery Penalty Case

Taxpayer Wins Major Victory At Pleadings Stage On Trust Fund Recovery Penalty Case

Employees are required to withhold federal income and social security taxes from the wages of their employees.  If an employer fails to do so, the government will often assert the trust fund recovery penalty (“TFRP”) against those responsible for payroll decisions.

Generally, the bar to assert the TFRP is a low one.  First, the government must merely show that the taxpayer was a “responsible person,” i.e., someone with a certain degree of decision-making authority over payroll.  Although this almost always includes owners of the employer company, it also commonly ensnares others such as executives or directors of the company.  Second, the government must show that the responsible person acted “willfully.”  For these purposes, willful conduct generally means that the responsible person voluntarily chose to pay other creditors over the IRS with knowledge of the outstanding IRS payroll obligations.

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How To Appeal The Trust Fund Recovery Penalty

Venar Ayar - Trust Fund Recovery Penal

The trust fund recovery penalty (TFRP) is equal to 100% of any unpaid trust fund taxes. You may become personally responsible for this penalty if the IRS determines that you are a responsible person at the business who willfully failed to send the payroll tax money to the IRS.

The TFRP is a severe penalty, and you should consult a tax attorney if you are being investigated for a possible TFRP assessment.

Negotiating The TFRP

First, you have the option to request mediation before the IRS assess the TFRP. This involves a neutral mediator who will attempt to reach a settlement between you and the IRS.

The good thing about mediation is that it isn’t binding on either party. If you don’t like the deal, the IRS can move forward with the penalty assessment and you can use your formal appeal rights.

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