The Trust Fund Recovery Penalty (TFRP) is a severe tax penalty assessed against individuals who fail to comply with certain payroll tax obligations. You may have several defenses and appeal options if the IRS assesses the TFRP, so contact a tax attorney for assistance.
Key Insights We Will Discuss:
- When the TFRP may be assessed
- What to expect if the IRS is investigating a potential TFRP case
- Possible defenses to a TFRP assessment
What Is The Trust Fund Recovery Penalty?
Trust fund taxes are the employee’s portion of employment taxes and federal income taxes withheld from employee paychecks. The employer holds this money “in trust” and is responsible for submitting it to the IRS.
The TFRP can be assessed against an individual who meets the following criteria:
I for one am glad that 2016 finally ended. Coming out of a contentious election with a boat load of vitriol thrown around, I don’t know about you, but I was swinging between the need for relief for it all to be over and the fear of who would take over the presidency and if it would go into capable hands. I am so glad tax season started so I can get to the business of preparing returns!
Lord, hou schulde God approve that you robbe Petur and gif is robbere to Poule in ye name of Crist?”
John Wycliffe, Selected English Works, c. 1380
In medieval England, the Christian Peter and Paul were two peas in a pod. They were both apostles and both martyred in Rome. They even shared the same feast day (June 29). So, the idea behind the phrase “robbing Peter to pay Paul” is that the victim and payee are similar in wisdom and stature (to borrow a phrase). The modern-day equivalent is taking a cash advance from one credit card to make the minimum payment on another one, assuming that they both have a similar interest rate. Read More
§ 5:1 In General
Congress enacted the Trust Fund Recovery Penalty Statute to encourage prompt payment of withheld and other collected taxes by allowing the IRS to assert a liability against responsible third parties. [IRC § 6672] The amount of the penalty imposed by the statute for failure to comply with its provisions is measured by the tax required to be collected or collected and not paid over. That is why the liability is referred to as a “100% Penalty.” The penalty is civil in nature, not criminal. The penalty is also sometimes called a Trust Fund Penalty because of the provisions of IRC §7501. IRC § 6672 reads as follows:
Any person required to collect, personally account for, and pay over any taxes owed by this title who willfully fails to collect such tax, or personally account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax on the penalty thereof,, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under § 6653 for any offense to which this section is applicable.
§ 5:2 Trust Fund
Congress clearly restricted the provisions of IRC §6672 to “Trust Fund” taxes as defined in IRC §7501. In other words, the penalty only applies to collected or withheld taxes that are imposed on persons other than the party who collects; accounts for, and pays over such taxes. The statute does not apply to direct taxes such as the employer’s portion of FICA, FUTA, noncollected income taxes, nor noncollected excise taxes. IRC § 7501 reads as follows: Read More