Trust Fund Recovery Penalty
If your company doesn’t pay its payroll taxes, the IRS will come knocking on your door. Businesses may wind up in this situation for a variety of reasons and find themselves facing a Trust Fund Recovery Penalty.
Being hit with a Trust Fund Recovery Penalty can be devastating for a business, especially if the organization is already struggling financially or has additional IRS debt.
If you’re facing a Trust Fund Recovery Penalty, it’s important to understand what this penalty is, who is responsible and your options.
What is the Trust Fund Recovery Penalty?
Under Section 6672(a) of the Internal Revenue Code (a.k.a. the Trust Fund Recovery Penalty), the IRS has the ability to collect unpaid payroll taxes from certain individuals.
Businesses have a legal obligation to withhold federal income taxes as well as an employee’s share of Medicare and Social Security taxes. It’s also a business’s responsibility to remit those taxes and their own share of payroll taxes to the IRS.
Failing to collect, withhold and remit these taxes can result in significant penalties and interest.
Who is Responsible for Paying a Trust Fund Recovery Penalty?
In order for the Trust Fund Recovery Penalty to be assessed against a person, two criteria must be met:
- The person must be responsible for paying and withholding the employment taxes, AND
- The person must willfully fail to collect or pay the taxes
Responsible persons include but are not limited to:
- A corporate director
- An employee or an officer of the organization
- A Payroll Service Provider
- A Professional Employer Organization
- A third-party payer
Responsible parties can be any persons or groups of persons who have the duty of collecting and paying trust fund taxes. However, the IRS bases responsibility on whether the individual’s decisions were made independently or directed by a superior.
Proving willfulness is a bit more complex. According to the IRS, a responsible party may have willfully failed to collect and pay these taxes if:
- They should have known of the outstanding taxes
- There was intentional disregard or indifference to the law
For example, if a responsible person uses money allocated for payroll and income taxes to pay another bill, this is an indication of willfulness.
How Much is the Penalty?
The Tax Fund Recovery Penalty can be hefty – equal to the amount of taxes owed. That includes the income taxes withheld as well as the employee’s Medicare and Social Security contributions.
Keep in mind that this penalty is in addition to the taxes already owed.
For example, let’s say that a single employee has an unpaid tax bill of $180.50. You would owe this amount plus this amount again as a penalty. In other words, your bill is doubled.
For businesses with multiple employees, the Tax Fund Recovery Penalty can be staggering.
How Does the IRS Assess a Trust Fund Recovery Penalty?
When the IRS assesses a Trust Fund Recovery Penalty, the first thing they do is send an officer out to assess the situation. The officer will first want to determine who is responsible. Interviews may be conducted to understand the full scope of an individual’s duties and responsibilities within the organization.
The IRS will also request documents and information relating to the investigation, which may include:
- Canceled checks
- Bank statements
- Who is responsible for paying the company’s bills
- Partnership contracts
- Articles of incorporation
The IRS wants to determine who is responsible for making employment tax payments and which individuals are in places of power within the organization.
When the IRS has an idea of which individual or individuals may be responsible, they will likely request a Form 4180 interview.
The 4180 Interview Process
A Form 4180 interview typically starts with personal information questions, such as your name, address and Social Security number. You will then be asked questions about your relationship with the company and your role.
The interviewer will have a checklist of questions to go through, such as:
- Did you authorize payroll?
- Did you direct or authorize payments to creditors?
- Did you make or authorize Federal Tax Deposits?
- When or how did you become aware of the unpaid taxes?
The purpose of the interview and this form is to identify the responsible party or parties so that the penalty can be properly assessed.
What Happens if the IRS Thinks You’re Responsible for the Tax Fund Recovery Penalty?
If the IRS believes that you are responsible for the Tax Fund Recovery Penalty, they will send you a letter (Letter 1153) along with Form 2751.
By signing this form, you are admitting liability. Consult with an attorney before taking any action.
The IRS has three years to assess a penalty, and the countdown starts April 15, after the year the taxes were supposed to be filed. Once this window has closed, the IRS cannot assess the penalty and it is illegal for them to conduct interviews or investigations on the matter.
If the IRS does assess a penalty, the agency has 10 years to collect it. During this time period, they have the authority to garnish your wages or seize assets to satisfy the debt.
What are Your Settlement Options?
At the end of the day, the IRS wants what it’s owed, but they may be willing to work with you to settle the penalty. If you cannot pay the bill outright, you may be able to apply for:
- A payment plan, or
- An installment agreement
Depending on the circumstances, you may have the ability to settle for less than you owe through a partial payment installment agreement or the offer in compromise program.
It’s important to note that the Tax Fund Recovery Penalty cannot be discharged through bankruptcy, so this is not an option.
The key is to come to an arrangement before the IRS takes more drastic measures, like seizing assets.
Call a Tax Attorney Today
The Tax Fund Recovery Penalty can have far-reaching consequences within a business and quickly lead to even more financial strain.
If you are facing the Tax Fund Recovery Penalty, call a tax attorney today to learn about your options for settling or abatement.