Trust Fund Recovery Penalty

TFRP or Trust Fund Recovery Penalty

What does TFRP mean? Trust Fund Recovery Penalty also known as TFRP, basically means you can be held personally liable for a penalty for not properly managing the employment taxes of a business. This is known as the “trust fund recovery penalty” (TFRP).

The TFRP is not a penalty in the traditional sense of being an amount added to a deficiency in tax due by an individual, corporation, or another taxpayer. Rather, the TFRP is a collection device that permits the IRS to impose liability on a “responsible person” who “willfully” failed to remit the employment taxes that were held in trust for the government.

TFRP cases rely heavily upon the fact pattern, and your success in defeating the penalty depends on the presentation of the evidence and knowledge of the IRS’s TFRP procedures.

The Two Prongs of the Trust Fund Recovery Penalty

There are two statutory components that must be established under IRC section 6672(a) before a person can be held liable for the TFRP.

First, the individual must be a “responsible person” for withholding and paying employment taxes to the IRS. Second, the person must have “willfully” failed to collect and remit the employment taxes due.

For purposes of IRC section 6672(a), the liability of a responsible person who has acted willfully is equal to the federal income taxes withheld from the employees’ wages and the employees’ share of the Social Security and Medicare (i.e., FICA) taxes.

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The IRS requires businesses to withhold a certain amount of funds from employee paychecks every pay period. These funds, which include social security and Medicare contributions, are to be held in “Trust” by the employer until paid in full to the IRS.  When a business fails to pay these Payroll withholding taxes held in trust to the IRS… the IRS will look to determine who was responsible for the payroll tax deposits, and these individuals may be targeted and held accountable through what is known as the trust fund recovery penalty.  Read on to learn more about how the TFRP is determined and how the penalty can be managed.

Two Key Determining Factors For The Trust Fund Recovery Penalty

When determining if and how to administer this penalty, the IRS must consider two key factors.

  1. The first is who is responsible for failing to pay the payroll deposits.
  2. The second factor to consider is if this failure to pay was Willful.

Who Is Responsible?

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Failure To Collect And Pay Over Tax, Or Attempt To Evade Or Defeat Tax

Also Referred to as Internal Revenue Code Section 6672; I.R.C. § 6672; Section 6672; Trust Fund Recovery Penalty

Background.  In certain instances, the Internal Revenue Code (the “Code”) requires persons to withhold certain taxes (e.g., excise or employment) on the government’s behalf and then remit those same taxes to the government.  In this manner, the person acts similar to a fiduciary on behalf of the government until such amounts are paid in full.  A person’s failure to pay the government can result in so-called “trust fund recovery penalties.”

Full Statutory Text

a. General Rule.

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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

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

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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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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