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AREAS OF PRACTICE
Trust Fund Recovery Penalty
The Trust Fund Recovery Penalty (TFRP) is also sometimes referred to as the Responsible Person Penalty, Responsible Officer Penalty, or 100% Penalty.
To encourage prompt payment of certain taxes, such as withheld employment taxes, Congress passed a law, I.R.C. § 6672, that provides for the TFRP or Responsible Person Penalty. Many state governments, have passed similar laws—for instance: C.R.S. § 39-21-116.5 (Colorado); Ariz. Rev. Stat. Ann. § 43-435 (Arizona); Mass. Gen. Laws ch. 62B, § 5 (Massachusetts); N.C. Gen. Stat. § 105-242.2(b) (North Carolina); S.C. Code Ann. § 12-8-2010(A) & (D) (South Carolina); Tex. Tax Code Ann. § 111.016 (Texas); Utah Code Ann. § 59-1-302(2) (Utah); Va. Code Ann. § 58.1-1813 (Virginia).
The TFRP, or Responsible Person Penalty, is a mechanism that the IRS uses to hold individuals, personally liable for the unpaid taxes of a company, including a corporation, limited liability company, partnership, or payroll service provider. Although the TFRP can be used to hold individuals responsible for several different types of tax, it most commonly used to hold them personally liable for a company’s non-payment of the “trust fund” portion of employment taxes.
Employment taxes, also referred to as payroll taxes or Form 941 taxes and Form 940 taxes, are unique. Employment taxes include the following taxes:
Employment taxes can be broken down into two parts: the “trust fund” portion of the taxes and the non-trust fund portion of the taxes.
Trust Fund Taxes vs. Non-Trust Fund Tax
The trust fund portion of employment taxes consists of the taxes that an employer withholds from an employee’s wages. When an employer pays its employees, the employer does not pay the employees all of the money that the employees earned. This is because employers are required to withhold taxes (income tax and the employee’s share of Social Security and Medicare taxes (FICA)) from their employees’ paychecks and pay the withheld taxes to the government. The income tax and employees’ share of FICA (social security and Medicare) that an employer withholds from its employees’ paychecks are part of the employees’ wages, although they are paid to the government instead of to the employees. These taxes are called “trust fund” taxes because an employer actually holds its employee’s money, in trust, until the employer pays the withheld amount to the government.
The non-trust fund portion of employment taxes consists of the taxes that an employer pays from the employer’s own funds: the employer’s share of Social Security and Medicare (FICA) tax, and federal unemployment tax (FUTA).
Employer’s Duty to Pay Withheld Funds
There are a number of reasons why a company may not pay withholding taxes to the IRS. For instance, those in charge of a company’s employment taxes may not be aware of the company’s employment tax obligations or how to meet them. Likewise, a company may simply forget to withhold income, Social Security, and Medicare taxes from employees’ wages when it runs payroll. Sometimes payroll and employment taxes may be forgotten in the struggle to keep a company running. Other times, companies find themselves in positions of having to make difficult financial decisions and tap into or borrow the taxes withheld from employees’ wages, using the money to pay other expenses and creditors, instead of paying the money to the IRS. More nefarious reasons include situations in which an employee makes a tax mistake and conceals it from his or her employer, or when a dishonest employee or payroll service provider steals or embezzles the withheld taxes.
Regardless of the reason, a company that fails to pay trust fund taxes to the government in a timely manner opens itself up to scrutiny, potential penalties, and even criminal prosecution. Further, it may subject “responsible” persons to personal liability for the company’s taxes.
While shareholders, officers, directors, members, managers, partners, and employees of corporations, limited liability companies, and partnerships are generally not personally liable for corporation, limited liability company, or partnership debts and obligations, they can be held personally liable for certain taxes under the TFRP.
Through its use of the TFRP, the IRS is authorized to “pierce the corporate veil” by assessing liability for the unpaid trust fund portion of a company’s employment taxes against the individuals that are responsible for the company’s failure to properly withhold and pay such trust fund taxes.
The TFRP imposes personal liability on “responsible persons” for “willful” failure to collect and pay over trust fund taxes withheld from employees. If a person was “responsible” for withholding, accounting for, or depositing or paying trust fund taxes, and “willfully” failed to do so, that person can be held personally liable for the TFRP, which is equal to the full amount (100%) of the unpaid trust fund tax, plus interest.
“Responsible persons” are those persons who have a duty to collect and pay over withholding taxes. Oftentimes, responsible persons are those persons who have authority to sign company checks, control payroll, sign tax returns, or direct the accounting of a company. A responsible person for this purpose can be an officer or director of a corporation, a shareholder, a member or manager of a LLC, a partner of a partnership, or an employee of any form of business, in addition to other individuals.
“Willfully” generally means that the responsible person knows that employment taxes are due, and paying other creditors instead of the IRS.
Contact an Employment Tax Attorney at the Politte Law Offices
The IRS is especially aggressive in employment tax and Trust Fund Recovery Penalty collection. The government likens a company’s failure to pay trust fund employment taxes to stealing because the withheld trust fund taxes are not the company’s money, but are employees’ money, held in trust by the company.
Unfortunately, a Trust Fund Recovery Penalty assessment can be devastating to the individual against whom it is assessed. The TFRP is often a very large amount, and it cannot be discharged in bankruptcy.
If you are a shareholders, officer, director, member, manager, partner, or employee of a business that is facing employment tax problems, or if you are the potential target of an IRS assessment of the TFRP, call the employment tax attorneys at the Politte Law Offices immediately. Do not speak to the IRS, no matter how friendly or helpful the IRS agent may seem, as this may damage your case. IRS agents are specially trained in employment tax matters to extract as much information as they can in order to use that information against both the business and individuals who the IRS may hold responsible for the Trust Fund Recovery Penalty.
Our tax attorneys can help you and your company navigate through its employment tax issues and potential or actual TFRP issues, and minimize the negative consequences to both you and your company.
Experienced legal counsel can often make the difference. The attorneys at the Politte Law Offices are experienced in handling Trust Fund Recovery or Responsible Person Penalty cases, and have successfully defended many individuals against assessment of the TFRP. We represent clients at all stages involving the Trust Fund Recovery Penalty, which include the IRS’s initial TFRP investigations, when the IRS proposes TFRP assessments, appealing proposed TFRP assessments, when the IRS actually assesses the TFPR, appealing TFRP assessments, filing claims for refund challenging TFRP assessments, litigating TFRP assessments in court and on appeal, and the IRS’s collection of the TFRP.
Contact the employment tax attorneys at the Politte Law Offices today by calling 303-261-8044 or using our online form.
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