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Employment Taxes and 

the Trust Fund Recovery Penalty (TFRP)

To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the TFRP. These taxes are called trust fund taxes because you actually hold the employee's money in trust until you make a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.

Who Can Be Responsible for the TFRP

The TFRP may be assessed against any person who:

  • is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and

  • willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

  • an officer or an employee of a corporation,

  • a member or employee of a partnership,

  • a corporate director or shareholder,

  • a member of a board of trustees of a nonprofit organization,

  • another person with authority and control over funds to direct their disbursement, or

  • another corporation.

For willfulness to exist, the responsible person:

  • must have been, or should have been, aware of the outstanding taxes and

  • either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

You may be asked to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee's function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. Notice 784, Could You Be Personally Liable for Certain Unpaid Federal Taxes?, contains additional information regarding the TFRP.

Figuring the TFRP Amount

The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:

  • The unpaid income taxes withheld, plus

  • The employee's portion of the withheld FICA taxes.

For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.

Assessing the TFRP

If [the IRS determines] that you are a responsible person, [the IRS] will provide you a letter stating that [it] plan[s] to assess the TFRP against you. You have 60 days after [the IRS] deliver[s] the letter to appeal [the IRS] proposal. The letter will explain your appeal rights. Refer to Publication 5 (PDF), Your Appeal Rights and How to Prepare a Protest if You Don't Agree, for a clear outline of the appeals process. If you do not respond to [the IRS] letter, [the IRS] will assess the penalty against you and send you a Notice and Demand for Payment.

Caution

Once the IRS assesses the penalty, it will take collection action against your personal assets. For instance, it can  file a federal tax lien or take levy or seizure action.

Avoiding the TFRP

You can avoid the TFRP by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required. Make your tax deposits and payments on time. Additional information on employment taxes can be found in Publication 15, Employer's Tax Guide, and Form 941 (PDF),  Employer's Quarterly Federal Tax Return (PDF).

Per IRS Website - 10/2005

   Above limited information is intended for informational purposes only.  If legal advice or other expert assistance is required, the services of a competent professional should be sought, and this general information should not be relied upon without such professional assistance.

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For assistance please contact A. Nathan Zeliff, Attorney at Law

 

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