Trust Fund Recovery Penalties (TFRP) Q & A

Written By Attorney Michelle Wynn on 3/2/17
What is a Trust Fund Recovery Penalty?

When a business owes “trust fund taxes” the IRS can assess a Trust Fund Recovery Penalty (referred to as “TFRP”) against any “responsible person” who was supposed to withhold the funds and pay them over to the IRS. This often means that the IRS can assess this penalty against more than one person in any given business. Most often this penalty is assessed against business owners, most typically those associated with the running of the business (less often with business owners that are not involved in the management, such as silent partners or investors), and sometimes against people like bookkeepers who have some discretion where to apply payments for the company.

The Trust Fund Recovery Penalty is equal to the amount of unpaid “trust fund taxes” which are also owed by the business. This acts as a shared liability between the individual who is assessed the penalty and the business that actually owed the taxes in the first place. This means that the IRS can collect the penalty from either the individual or the business (or some from each), but not more than the total amount of “trust fund taxes” owed jointly.

What are “Trust Fund Taxes”?

Trust fund taxes refer to any types of taxes that are actually or constructively withheld from payments to a business or from a business and are supposed to be paid over to the IRS. The most common example of trust fund taxes are the portion of the payroll taxes that show on an employee’s pay stub as being withheld for Social Security, Medicare, and Income Tax payments. Another common example of trust fund taxes are excise taxes that are supposed to be collected by a business when it sells goods or services that are subject to excise taxes (referred to as “collected excise taxes”).

Who is a “responsible person” for Trust Fund Recovery Penalty purposes?

Under Internal Revenue Code 6672 (IRC 6672), a “responsible person” is “any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof”. This means that a person must both be responsible for the collection of taxes and willfully fail to collect and pay over the taxes.  In order to be held responsible, a person must have had the duty to withhold and remit taxes, the power to direct the collecting of the taxes, some authority to pay trust fund taxes, and the authority to determine which creditors will or will not be paid. Willfulness does not typically require much in this context, all that it really requires in most cases is that the person was aware that the taxes were not being paid and that the failure to not pay the taxes was not accidental. Many Revenue Officers will take the position of asserting the Trust Fund Recovery Penalty against any person that they can even suggest may have had this level of authority and knowledge and then put the burden on the person to challenge this assessment with IRS Appeals.

What does it mean when a TFRP Assessment has occurred?

A TFRP Assessment refers to the actual act of imposing the Trust Fund Recovery Penalty against an individual.

How is the Trust Fund Recovery Penalty imposed on a person?

In order to make a TFRP assessment, an IRS Revenue Officer will meet with the individuals who may be found to be responsible persons. Typically, this will include any business owners and any will sometimes also include bookkeepers, CEOs, CFOs, and other managers who might have had both control over company finances and control over employees. These meetings are often called “4180 interviews” referring to the IRS Form 4180 that is completed by the Revenue Officer based on the information discussed in the interview and then signed off on by the person who was the subject of the interview, to agree that the information contained on the form is true and accurate.

Am I Allowed to be Represented by Counsel in the Interview?

Yes, every person subjected to a 4180 interview/ TFRP Assessment Interview is entitled to have counsel present with them. It is typically a good idea to have experienced legal counsel with you at the interview to protect your own interests and to help keep the conversation focused on the issue of a TFRP assessment, rather than gathering information to be used in IRS collections efforts or, in a worst case scenario, an IRS Criminal Investigation. An experienced tax attorney can also help you key in on important times to provide the IRS with specific information to help you meet your goals, whether the goal is keeping the assessment focused on you, the business owner (rather than an unsuspecting bookkeeper), or whether the goal is to avoid personal assessment against yourself. Just as no lawyer can guarantee you a result in any legal matter, a lawyer cannot guarantee that they will be able to meet your goals for a successful TFRP interview, but having an experienced tax lawyer with you can give you a realistic idea of the outcome to anticipate and can help you build the case for the goals you have set.

After a TFRP Assessment is Made, What Comes Next?

If you do not agree with the Revenue Officer’s proposed findings that you are a responsible person and imposing the Trust Fund Recovery Penalty against you, you can proceed with a formal protest of this finding and contest the finding with the Revenue Officer’s manager and, if needed, IRS Appeals.

If you do agree that it is proper to assess the Trust Fund Recovery Penalty against you, then you can consider all the possible resolution options available for any individual tax liability. These may include:

Payment in Full
Trust Fund Recovery Penalties generally cannot be discharged in bankruptcy.

In addition to the normal considerations of how to resolve an individual tax liability, if there are limited resources available to pay the debt, as between the business and the individual, there are considerations to make as to how to structure any payments towards the trust fund amounts between the two entities. These are decisions that need to be made on a case-by-case basis and having an experienced tax attorney can help you greatly in determining what the best options are for you and your business.

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