By Mia Khattar
COVID 19 has had a profound impact on the lives of business owners globally. Some businesses flourished while others crumbled under the ever-increasing struggles brought forth by the pandemic. The latter case attributed to many businesses cutting their costs in ways such as, letting go of their employees or employing more cost-effective means of production.
However, some businesses may have taken a different approach, not paying their trust fund taxes to the IRS, thus resulting in a Trust Fund Recovery Penalty, or TFRP, being filled against them.
What is a Trust Fund Recovery Penalty?
A TFRP is a penalty the IRS assesses to individuals who are responsible for collecting and or paying a company’s trust fund taxes to the government, yet willfully evade, or try to evade, paying them. The severity of the penalty incurred is equivalent to the total amount of trust fund taxes not accounted for, not collected, or not paid for to the IRS. It is also important to note that interest is charged on the penalty.
Trust fund taxes are employee finances which employers hold in trust until they are able to pay them to the government. These taxes consist of categories such as, withheld employee tax and employees’ Medicare or Social Security taxes, but not the employer’ portion. Some examples of these taxes are railroad retirement taxes, FICA taxes, withheld income taxes, and collected excise taxes which may include taxes on specific communications services and air transportation.
These trust fund taxes are paid to the government in quarterly increments, thus the easiest way for a company to get into conflict with the IRS is if they utilize their employees’ trusts to finance other expenses rather than what they were intended to be used for.
The reason the government is so strict on the payment of these taxes is because they are used to cover the costs for services such as Medicare and Social Security. If the government does not receive these taxes, they are losing money.
Additionally, the IRS views this form of tax evasion as stealing from the company’s employees as they are the individuals who benefit the most from these programs. Simultaneously, it is also viewed as stealing money which was taken from employee’s paychecks for tax purposes.
If you have committed an act similar to the ones listed you may expect a TFRP to be filed against you, however for it to be successful, you must be both the “responsible” individual and “willfully” evade paying the dues to the IRS.
“Responsible” and “Willful”
To have a TFRP filed against you, you as an individual must be both “responsible” for collecting and paying your company’s trust fund taxes to the government while simultaneously “willfully” evade paying them. According to IRC 6671(b), in order to be categorized as a “responsible” individual one must possess the authority and control over the allocation of a business’s finances and their payments to the government.
This individual may hold the title of officer or employee or even a partner of a company. If your company utilizes a third-party payroll service providers, or PSP, to complete payroll duties and that provider is at fault, the employer will still be considered responsible for the faulty deposit of the trust fund taxes.
Even though an individual may be “responsible” for the failure to pay the trust fund taxes they also must have “willfully” evaded payment. IRC section 6672 states that willingness is both a voluntary and conscious decision made not to remit the trust fund taxes to the government, despite being aware of their existence, and instead to use them to pay ulterior creditors. An example of this may be utilizing employment taxes to fund the business instead of paying them to the IRS.
To learn more about what it means to be “responsible” and “willful” you may reference IRC Sections 6672, 7501, and 3505.
How Delia Law May Help
TFRP investigations are conducted by IRS Revenue Officers from the collection function. Your assigned officer will request business records such as bank signatures and checks in an attempt to identify the responsible individual.
Following the initial collection, the Revenue Officer will schedule an interview with any individuals they deem may potentially be responsible to get them to sign Form 4180, a Report of Interview with Individual Revenue to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes. This form is extremely important as it is designed to elicit responses as to whether the individual’s actions were carried out “willfully.”
Here at Delia Law, we will represent you in the interview and aid you in filling out Form 4180 in such a way to best reflect your responsibility, if any. Additionally, we will work with you to gather essential documents that showcase your duties within the company as well as the involvement of other potentially responsible individuals. We will also collect statements from your employees and other relevant individuals. In a TFRP investigation someone will be held accountable, and we will put in our best effort to come to the best resolution for you.