Resolving Trust Fund Recovery Penalty Disputes

Venar Ayar - Trust Fund Penalty Dispute

What are Trust Fund Taxes?

Trust fund taxes include the Social Security, Medicare, and federal income tax a business withholds from its employees’ wages. These amounts are held in trust by the business until they are transferred to the IRS.

In other words, these taxes are effectively being paid by the employee to the IRS. The employer is just an intermediary responsible for facilitating the transaction.

When the employer fails to remit these amounts to the IRS, bad things can happen. First, the employer can face the failure to deposit penalty for unpaid payroll taxes if the payments are even one day late.

Next, the IRS may decide to assess the trust fund recovery penalty (TFRP). This penalty is severe for several reasons:

  • The penalty is equal to 100 percent of the unpaid trust fund taxes.
  • The penalty is assessed against “responsible persons” as individuals, not the business itself
Letter 1153 And Form 2751

If you receive Letter 1153 and Form 2751, the IRS is proposing to assess the TFRP (trust fund recovery penalty) against you. You have 60 days to respond to the proposed assessment, but you should notify the IRS within 10 days if you disagree with the proposed assessment.

First, don’t sign Form 2751 without talking to a tax attorney first. This is an admission of guilt and should only be signed once you are absolutely sure you know what you’re admitting to. You also have the option of paying the trust fund taxes personally in order to avoid the TFRP.

If you disagree with the TFRP, your tax attorney can help you try to resolve the matter informally with the IRS. You may be able to use any of the following facts as a defense:

  • You aren’t a responsible person who can be assessed the TFRP.
  • Your actions in failing to remit tax deposits were not willful.
  • The statute of limitations for assessing the TFRP has expired.

If you can’t come to an informal resolution, you have 60 days from the date Letter 1153 was sent to submit your case to the IRS Office of Appeals.

Collecting The Trust Fund Recovery Penalty

If you don’t do anything within 60 days, the IRS will proceed with the proposed assessment. They can then begin the collections process and file a tax lien against your property or attempt to levy your assets.

Have you been notified on a trust fund penalty assessment?

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Venar Ayar

One thought on “Resolving Trust Fund Recovery Penalty Disputes

  1. Avatar Andy says:

    On these cases you never know. Many many years ago (about 1972) client was ready to close down his business and let the corporation be dissolved. Told him to pay all employment taxes first whether or not all creditors got paid. He did that. For whatever reason (I suspect because he used the wrong year’s payment coupon) IRS refunded him the $1,000. Which he spent. Time passes and IRS looks for someone to impose TFRP on. In the end after proof that the $1,000 was paid and without explaining further, IRS dropped the case. Answer might have been different if the balance had been greater.

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