End Your Tax Problems. Start with Free Consultation.

Trust Fund Recovery Penalty

A lot of work is required to run a business properly. One of the largest responsibilities is to manage the taxes of employees. 

It’s common practice for the employer to withhold from each employee’s paycheck income taxes as well as Medicare and Social Security contributions. The IRS refers to these tax withholdings as Trust fund taxes that the employer holds in trust for the benefit of the employee, and they are required to be sent directly to the IRS. 

Failing to hand over these payroll withholdings to the IRS can result in an employer being charged with a Trust Fund Recovery Penalty. The IRS takes these charges very seriously, and they often come with severe consequences. 

If the IRS assesses a Trust Fund Recovery Penalty against you, or if you are worried that the IRS could assess a Trust Fund Recovery Penalty against you, then you should seek legal counsel immediately. The tax experts at Coast One Tax Group can look over your financial records and review the details of your case. It’s possible that they can convince the IRS to drop the charges and get you out of serious trouble. 

What Is The Trust Fund Recovery Penalty?

The Trust Fund Recovery Penalty (TFRP) is a penalty that is assessed against an employer by the IRS due to the employer has failed to timely turn over the income tax, Medicare, and Social Security payments withheld from the employee’s pay to the IRS. 

These taxes are considered to be trust fund taxes because the funds are held in a trust until they are federally deposited. If the taxes are not handed over to the IRS, then the IRS will launch an investigation and determine who should be held accountable. 

Who Can Be Charged A Trust Fund Recovery Penalty?

A TFRP can be levied against anyone that willingly fails to collect and pay the trust fund taxes of their employees. No individual is exempt from this penalty, and the business owners, CEOs, and directors can all be charged. 

The paper trail of taxes usually leads directly to the payroll department, so the accountants, bookkeepers, and human resource officers are the first to be investigated. It’s possible to hold multiple people responsible. 

The IRS would need to prove that the person or people in question were aware that the taxes were due and made the conscious decision not to pay them. If these allegations are proven, there can be severe consequences. 

What Are The Consequences Of A Trust Fund Recovery Penalty?

The IRS typically prosecutes cases involving payroll taxes much more often than income taxes. If found guilty of withholding trust fund payments to the government, you could face serious consequences

The first penalty is a payment equal to the amount of unpaid taxes. This is added to the trust fund taxes that are already past due.

For example, let’s say your business paid an employee $2,000 for their work and the stub claims withholdings in the amount of $200 for income tax, $112 for Social Security, and $25.50 for Medicare. Failing to send the total of $337.50 to the IRS could result in a TFRP. You and/or any responsible officer of the corporation/partnership would be assessed personally to pay the $337.50 that was originally owed, plus accumulating interest and penalty. 

These fees are just the beginning of the potential penalties. Not only would you be personally liable for paying the trust funds, but you could also be charged with an additional $10,000 fine and face up to five years in prison. 

What Is The Trust Fund Recovery Penalty Interview?

During the investigation of a potential TFRP, the IRS will summon anyone they think may be responsible. The IRS agents involved in the case will require the suspected parties to fill out the Questionnaire Form 4180

The official title of Form 4180 is the “Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes.” For the sake of brevity, these questions are typically referred to as a 4180 interview. 

If summoned, you’ll need to answer information regarding your duties with the company involving payroll, taxes, and general finances. The agents will review their findings and make a determination on who is responsible for repaying the taxes.

Can You Appeal A Trust Fund Recovery Penalty?

If the 4180 interview concludes with the IRS holding you responsible, you will have a chance to appeal the decision. The IRS will send you a proposed assessment regarding the TFRP, and you’ll be granted 60 days to appeal it. 

If you haven’t already, you should seriously consider consulting with a tax professional at this point. It can be very difficult to appeal the decision made after the 4180 interviews. Having an expert in tax law can greatly increase your odds of a successful appeal. 

The first thing you will need to do is request a copy of all the notes and evidence used to name you responsible. The Freedom of Information Act permits you access to these documents. Reviewing them can help provide insights as to why you were named liable for the missing taxes. 

An appeal officer for the IRS would hear your case and decide. Although it’s unlikely, they might overturn the previous decision and drop all charges against you. If the decision is upheld, you will only have one option: district court. 

It’s important to note that taking the case to the district court will cost you, and the IRS might countersue for court costs. You should only attempt this option if you are completely innocent and have the evidence to prove it. 

How Can You Settle A Trust Fund Recovery Penalty?

The main goal of the IRS is to collect the money that it’s owed. They are more interested in payments as opposed to punishments. Regardless of the nature of your tax liability, the IRS is often willing to help you pay the amount owed to them. It’s best to work with the IRS and try to pay off your tax liability. 

There are collection actions the IRS can employ that are much more aggressive than traditional collecting agencies. The IRS can withhold your tax refunds, garnish wages from your paycheck, and even seize your personal property. 

These are the most commonly used programs that can help you pay off your tax bills:

Installment Agreement

An installment agreement is an established payment plan with the IRS that will allow you to pay off your back tax within a specific timeframe. There are usually interest charges, late fees, and other fines involved with using an installment agreement. 

These penalties will be added to the total amount of tax owed. The new balance will be divided by the total number of months agreed upon. You’ll be responsible for making these monthly payments until the tax is settled, or the IRS will take aggressive actions to recover the money. 

Offer In Compromise

It can be a good idea to try for an offer in compromise if the tax owed is more than you afford. An offer in compromise is an attempt to settle the tax liability for less than the total amount. The IRS usually rejects these offers as they typically hold all the cards in negotiations. They are under no legal obligation to accept the offer or even seriously entertain the idea of it. 

There will be a non-refundable application fee of $205, so you should only make a serious offer. A tax professional can review your finances and help you come up with a number that is more likely to be accepted by the IRS.

Currently Not Collectible

A currently not collectible status is rarely granted, but it could give you some extra time to come up with the funds to pay your tax bills. It’s important to note that a currently not collectible status is not forgiveness. You will still be on the hook for the total tax owed. 

A currently not collectible status will only freeze collection attempts and give you an opportunity to consolidate the funds to pay your tax.

What Can The IRS Do If You Don’t Pay The Trust Fund Recovery Penalty?

The IRS can take much more aggressive actions than credit card companies or banks when trying to recover tax liability. The strongest method employed by the IRS is to employ various tax levies

These are a few examples of the most common tax levies:

  • Withholding tax refunds. Most people will overpay their income tax obligation throughout the year and be eligible for a tax refund after filing their return. If you owe the IRS any money, they will simply withhold this refund and apply the money toward your owed taxes.
  • Garnishing your wages. The IRS can speak with your employer and request that they withhold a certain percentage of your paycheck. The total amount can vary, but it’s usually less than 15% of your total pay.
  • Seizing your assets. There are some limits to what the IRS can take, but your home, vehicle, property, and jewelry are all at stake. The items will be sold at a public auction, and the proceeds will be applied toward your back taxes.

The Takeaway

A Trust Fund Recovery Penalty is a very serious charge and can result in severe consequences. If the IRS has accused you of withholding trust fund taxes, you should seek legal counsel immediately. 

The tax relief professionals at Coast One Tax Group have decades of experience dealing with the IRS. They can review the details of your case, offer advice on how to proceed, and help you plan a defense strategy.  

SOURCES:

Currently Not Collectible | Taxpayer Advocate Service

Employment Taxes and the Trust Fund Recovery Penalty | Internal Revenue Service

IRS Trust Fund Recovery Penalty | HG.org

Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes | Tax Resolutions Institute

Trust Fund Taxes | Internal Revenue Service

What Is a Tax Levy? | The Balance

Payment Plans Installment Agreements | Internal Revenue Service

Freedom of Information Act: Learn | FOIA.gov

Offer in Compromise | Internal Revenue Service