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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:
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.
When the IRS
wants you ... you want TaxSOS.com
For
assistance please
contact A. Nathan Zeliff, Attorney at Law
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