What is A Trust Fund Recovery Penalty?

A Trust Fund Recovery Penalty (TRFP) is a penalty that is imposed against a person whose role in the business is to withhold, deposit or pay trust fund taxes to the IRS. This type of tax is called a trust fund because you are trusted to hold your employee’s money in an actual bank account. The funds are held until you make the needed, monthly estimated tax deposits. These tax deposits are a requirement with the IRS for every business that has employees. Each employee must be paid wages and have the trust fund portion of taxes, such as Medicaid, federal withholding and social security withheld each pay period. 

 

Trust Fund Recovery Penalty

The Trust Fund Recovery penalty is not derived from an amount added to the extra tax assessed, such as on an individual level. It is assessed to a business, and even an individual, when the trust fund taxes are withheld from the employee’s paycheck and the employer agreed to remit that money to the IRS, but never did. Each TFRP is equal to 100% of the unpaid taxes. Since this is civil and not a criminal offense, it is often called a “Civil Penalty”

Trust Fund Recovery Penalty

Can the Debt Become your Responsibility?

If the taxes are not paid, the IRS will assume it’s willful neglect or an attempt to avoid payment. The Trust Fund Recovery Penalty is a collections action that allows the IRS to impose the tax liabilities on the “potential responsible persons” of the business. That would mean that the business debt can be assessed to you personally. This person must be deemed in charge of collecting and paying the employment taxes to the IRS. Even if your position is not directly related to payroll there are a lot of other titles within the business that can still be held at fault.

 

Responsible parties can be a member of the board, an officer or employee of the corp, payroll service providers, sole proprietor, a partner, or any other employee who handles a part of the decision making.  The most common factor that the IRS uses to determine if you will be personally liable for the trust fund penalty, is by whether or not the person signs the business checks. Second, this person must have “willfully” failed to collect and pay the employment taxes that were due. Willful neglect can be proven when there are funds available to the business and they are being used to pay other creditors rather than the employment taxes. TheIRS takes this case very serious because the likely responsible parties, willfully neglected to submit the employment taxes that were held in trust to the IRS.

The Penalties of a Trust Fund Recovery

If the IRS determines that you are a responsible person for the business, they will send you a notice. This notice will make you aware that a TFRP will be assessed against you. The statute of limitations, also known as the maximum time, allowed for the IRS to assess a trust fund recovery penalty is three years. The three-year timeframe begins once a business accepts that they have to file a Form 941, Employment Tax Return. Once three years passes, the IRS can no longer assess a penalty against you personally in regards to the business’ unpaid tax. However, once the penalty is imposed, the IRS can take collection actions against you as well as your personal assets. On the initial notice that you received, there will be a date printed on the top right-hand corner. You have 60 days from the date of the notice to respond to the IRS’s assessed, proposed penalty. You can either agree or disagree with the notice.If you disagree, you will have the right to Appeal this collection action of assessing you personally. It is very crucial you reply to this notice in a timely manner. If the notice is left ignored and no reply to the IRS is made, they will automatically assess the Trust Fund Recovery Penalty against you. It is always harder to undo something that the IRS forcefully does than to stop them from doing it in the first place.

Trust Fund Recovery Penalty

What Should I Expect During The Interview Process?

Once the initial notice is issued, it allows the IRS to move forward with the TFRP investigation. The Trust Fund Recovery investigation is held mainly by a Revenue Officer. A Revenue Officer is a directly assigned, more aggressive collection agent. These agents are still part of the IRS’s collection unit. The reason you are assigned to a Revenue Officer is because they will get fully in depth of your business records. They will also conduct field visits to the business and hold personal interviews.

The first thing a Revenue Officer will ask for is complete business records to determine who the likely responsible parties are. Business records and all data can be reported on a Form 433-B, Collection Information Statement for Business. The Revenue Officer will also request that copies of cancelled checks and bank cardsbe supplied. You must provide this information on your own accord and timely. If you fail to remit these documents when asked, the Revenue Officer has the ability to summon the info directly from the bank. The Revenue Officer will then proceed with looking into the records. Once all records are looked through, an interview will be planned for each responsible person that is listed on the bank card as well as in charge of performing other duties. You must agree, at will, to appear before the Revenue Officer when this interview is scheduled. Failure to show up to an interview will allow the Revenue Officer to summon you. Once summoned you are forced to appear for the interview. If you do not attend after being summoned, further aggressive action can be taken against you.

Trust Fund Recovery Penalty

What is the purpose of the Interview?

The purpose of the interview is to secure Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes. This Form contains questions that are designed to pull apart the answers you give. Most of the questions on the Form 4180 are made for more than just a simple “yes” or “no” answer. Complex answers help the Revenue Officerdecide whether the person was a responsible person and if they acted willfully in not paying the taxes. Through this interview, you will have to chance to let the Revenue Officer know what your role and duties within the company are.

Trust Fund Recovery Penalty

During the interview is when you have the option to make a written statement of your defense. You also have the right to hire a tax attorney or other authorized tax agent to bring with you to this interview. There have been cases where the IRS has tried to impose the tax on people who had knowledge of but no actual control. It is best to be represented by a professional who knows your rights. In conclusion of the interview, the Revenue Officer will then decide who will receive the notices of their pending personal tax debt linked to the Trust Fund Recovery Penalty. Once the tax debtis assessed to youdirectly it can be resolved like any other tax debt. This means that you can request an Offer in Compromise a partial pay Installment Agreement, Installment Agreement or currently non collectible status based on your financial status. The only action that will not ensure resolution ofthe Trust Fund Penalty is filing Chapter 7 Bankruptcy. If Bankruptcy is filed,it will not discharge the Personal tax portion of the Trust Fund Recovery Penalty tax debt that the IRS assessed.