Trust Fund Recovery Penalty

When you’re running a business, it’s not uncommon for things to slip through the cracks. Unfortunately, employment taxes are often one of these things. If you have failed to pay employment taxes when they are due, you are at high risk for a Trust Fund Recovery Penalty.

This is no small matter. You should begin taking action immediately. Luckily, there are solutions out there that can help get your business out of this sticky situation. To begin, the most important thing you can do is get familiar with what a Trust Fund Recovery Penalty means, why it happened and how you can get this situation taken care of.

WHAT IS A TRUST FUND RECOVERY PENALTY?

A Trust Fund Recovery Penalty (TFRP) involves the collecting of employment taxes by the IRS from the owners or corporate officers of a business that has failed to pay the employment taxes. The TFRP allows the government to reach parties otherwise shielded from tax liability, such as officers, shareholders, employees or a corporation, partnership or LLC, and in some cases, outside entities.

These taxes include Social Security and Medicare, as well as Federal Income taxes that are collected by the employer from employees and held “in trust” until due and payable.

WHY DOES THIS HAPPEN?

When a business fails to pay the IRS its employment taxes, the IRS will aggressively attempt to collect these taxes using tax liens and levies against the bank accounts, investments and property of the business.

WHO IS HELD RESPONSIBLE?

Depending on the situation, the IRS Revenue Officer may assess a TFRP against individuals involved in the business who have control over the use and disposition of the business’s assets. These individuals may have decision-making authority in connection with the payment of the business’s liabilities, and can be seen as “willfully” failing to pay the business’s Withholding Taxes.

The held taxes belong to the U.S. government, not the business, and have simply been held in trust by the business. Therefore, the IRS has full legal authority to assess and collect on a TFRP.

Before a TFRP can be assessed, an IRS Revenue Officer examines a number of factors to determine who was “willful and responsible” for the unpaid taxes. To name a few, these factors can include an individual’s check signing authority, the position held within the business, the percentage of ownership, who signed the tax returns and who hired or fired employees.

WHAT IS THE TRUST FUND RECOVERY PENALTY INTERVIEW?

Once the Revenue officer has a better idea of who might be responsible, he or she will question those individuals. The IRS has a form specifically used to determine “willfulness and responsibility” – Form 4180 “Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes.”

IS THERE A TIME LIMIT FOR THE IRS TO ASSESS THE TRUST FUND RECOVERY PENALTY?

The IRS is given a statute of limitations of three years for assessment of the TFRP.

CAN A TRUST FUND RECOVERY PENALTY ASSESSMENT DECISION BE APPEALED?

If an individual has a legitimate defense and can prove that they were either not willful in their non-payment or were not the individual responsible for the payment of the employment taxes, then it may be possible to make an appeal against the assessment.

The IRS is required to notify those whom they assess a TFRP by means of IRS Letter 1153. If you are assessed, you have 60 days from the date of the letter to file a protest to appeal that decision. This will give you the opportunity to present evidence that you were either not willful or were not responsible. Unfortunately, this process can be quite lengthy, and the IRS can take up to one year to hear a TFRP protest.

WHAT CAN BE DONE?

For the protection of yourself and your business, you should look into taking action immediately. You took the right first step by turning to 20/20 Tax Resolution, but in order to arm yourself with everything you need for the most successful resolution, you might need to know more about the tax professionals available to help you. To read more about how an Enrolled Agent can help, download our free guide.

If you are ready to begin your resolution process, speak with a tax expert today.

Dealing with this issue should be your top priority. Now is the time to resolve your tax problem and get back to doing what you do best – running your business.