Trust Fund Recovery Penalty – #1 – Introduction

TaxConnections Picture - Dollar Sign and Money1. INTRODUCTION

§ 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:

Whenever any person is required to collect or withhold any Internal Revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special, fund, in trust for the United States. The amount of such fund shall be assessed, collected, and paid in the same manner and subject to the same provisions and limitations (including penalties) as are applicable with respect to taxes from which such fund arose.

In summary, once a Trust Fund Recovery Penalty has been imposed, the IRS has the same rights to collect that penalty as it would any other tax from a taxpayer. The IRS gains the right to file liens and to levy and seize assets from the taxpayer.

Robert E. McKenzie is a partner of the law firm of Arnstein & Lehr LLP of Chicago, Illinois, concentrating his practice in representation before the Internal Revenue Service and state agencies. He has lectured extensively on the subject of taxation. He has presented courses before thousands of CPA’s, attorneys and enrolled agents nationwide. He has made numerous media appearances including Dateline NBC and The ABC Nightly News. Prior to entering private practice, Mr. McKenzie was employed by the Internal Revenue Service, Collection Division, in Chicago, Illinois. Since entering private practice, he has dedicated a major portion of his time to representation before the IRS. From 2009 to 2011, Mr. McKenzie was a member of the IRS Advisory Council, which advises IRS management. Mr. McKenzie serves on Arnstein & Lehr’s Executive Committee.

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