Federal tax law requires employers to withhold and remit income and employment taxes to the IRS. The obligation to pay these taxes – referred to as “trust fund taxes” – generally arises when payroll checks are disbursed to employees and is extinguished when the employer properly and timely deposits those taxes to the government.
If the employer fails to timely deposit the trust fund taxes, the IRS usually attempts to collect them directly from the employer. But, the IRS also has other options. Specifically, under I.R.C. § 6672, the IRS may go directly after any “responsible person” who “willfully” failed to collect, account for, and pay the taxes. For these purposes, the trust fund recovery penalty (TFRP) represents the employee’s portion of any employment tax—that is, the withheld income tax and the employee’s portion of the Federal Insurance Contributions Act (FICA) tax. This remedy is civil in nature, but it is important to note that the IRS may also refer TFRP cases for criminal prosecution, particularly in egregious cases.
To collect the TFRP against the taxpayer, the IRS must follow certain procedures. First, the IRS must conduct an examination to determine who is a responsible person and whether that person acted willfully. If the IRS determines the TFRP is appropriate, it is required to issue the taxpayer a Letter 1153, Proposed Trust Fund Recovery Penalty Notification. After receipt of the Letter 1153, the taxpayer has 60 days to file a written protest with the IRS contesting the TFRP determination. The IRS Independent Office of Appeals (Appeals) makes the final administrative determination as to whether the TFRP is appropriate.
On August 12, 2020, the Treasury Inspector General for Tax Administration (TIGTA) issued a report entitled “Existing Controls Did not Prevent Unauthorized Disclosures and Case Documentation Issues in Appeals Trust Fund Recovery Penalty Cases.” As part of its report, TIGTA sampled 125 Appeals TFRP cases and concluded that the IRS failed to follow proper procedure in at least 31 of those cases. This Insight provides a summary of the TIGTA report.