It’s probably fair to assume that business owners don’t start companies for the enjoyment of withholding taxes from employees. Collecting trust fund taxes is just one of the many mundane tasks that employers are obliged to take on. Nonetheless, many employers find themselves staring down an expensive Trust Fund Recovery Penalty if they don’t.
The IRS doesn’t take kindly to employers who don’t pay their trust fund taxes on time. They see it as an infraction with two victims: the federal government and the employed taxpayers. Therefore, trust fund recovery penalties are steep.
Trust Fund Taxes
Let’s start with the basics. Employers don’t pay their employees every penny they earn. Instead, they withhold some of their annual tax liability every paycheck. These taxes are placed into a fund precisely set aside for them. The IRS refers to these monies as trust fund taxes.
In essence, employees trust their employer to pay these taxes on their behalf. Not only is this a duty to the IRS, but also a commitment to employees. Employers withhold income tax, social security and Medicare, and send them to the Treasury in Federal Tax Deposits.
How the Trust Fund Works
Two important steps must be taken to accomplish a business’s goal of paying their employment taxes. First of all, the taxes must be computed and put into the trust fund. Furthermore, the taxes must be withdrawn and sent to the IRS with the Federal Tax Deposits. The time in between these steps probably pose a bit of a dilemma for struggling businesses. Stephen J. Dunn, Contributor at Forbes notes that “the taxing authorities are not standing at the door demanding their money.”
He continues, “So, the principals use the funds for other purposes, and put off paying the payroll taxes.” Although they continue to execute their other business tax practices, many keep payroll taxes on the back burner. It doesn’t take long for a struggling business to find themselves in trouble with the IRS. They have the legal charge to close the business and seize assets. The Internal Revenue Code (IRC) also allows them to pursue distinct taxpayers who have a stake in the business.
Trust Fund Recovery Penalty
While common penalties are assessed as a fee, such as with the Failure-to-File penalty, this one is different. The Trust Fund Recovery Penalty is a device used to collect employment taxes from those deemed responsible by IRC 6672. The code says:
“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, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.”
The “person” referred to in the code is often referred to as the “responsible person.” The IRS defines a responsible person as one who collects or pays withheld employment taxes or collects excise taxes. In addition, the responsible person willfully fails or neglects to pay them. There may be more than one person with these duties within the company.
Responsible Persons and the Trust Fund Recovery Penalty
The IRS defines a responsible person as a “person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.” They list the following examples:
- An officer or an employee of a corporation,
- A member or employee of a partnership,
- A corporate director or shareholder,
- A member of a board of trustees of nonprofit organization,
- Another person with authority and control over funds to direct their disbursement,
- Another corporation or third-party payer,
- Payroll Service Providers or responsible parties within one
- Professional Employer Organizations or responsible parties within one, or
- Responsible parties within the common law employer (like the client of a payroll service provider or professional employer organization.)
The IRS will determine that willfulness exists if the person should’ve known about the outstanding taxes and overlooked the law. As a result, the IRS pointedly notes that no evil intent or bad motive is required.
IRS Inquiries for the Trust Fund Recovery Penalty Assessment
The IRS will conduct a thorough investigation into the common business practices of the company. This is because it’s important to ensure that the Trust Fund Recovery Penalty is assessed on the right parties.
First, a revenue agent requests bank signer cards, cancelled checks and other references to banking business. Consequently, this sheds some light on who typically handles the company’s finances. If the company doesn’t furnish the IRS with requested items, they have the right to issue a clerical summons. This summons certainly compels the company to produce the records.
In addition to scouring pertinent records, the IRS may request an interview with seemingly key people within the company. If any person refuses to submit to an interview, the IRS can certainly subpoena sufficient answers to interview questions.
Getting Help with the Trust Fund Recovery Penalty Interview
The IRS uses the responses to interview questions to determine your level of duty to pay the company’s employment taxes. Penalties and interest for the overdue tax will be assessed, as well.
Kevin M. Flynn, JD, LLM of The CPA Journal also notes, “The purpose of this interview is to secure from the individual Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes.” Most notably, he goes on to say, “Form 4180 is a critically important document, and it can be perilous if an individual attends the interview or completes Form 4180 without legal representation and thorough preparation by counsel.”
The IRS purposely designed the questionnaire to elicit evidence from the taxpayer that may implicate him or her. Consequently, hiring a seasoned tax adviser helps to safeguard your integrity. A tax adviser should construct thorough and well-prepared answers to the questions on this form. This is critical for favorable results.
Furthermore, Flynn says, “A professional adviser must exhaustively develop the facts and review company business records, correspondence, and emails. These documents, together with affidavits from third parties, should be used to show the limitations on the authority and the lack of willfulness of the potential responsible person. The adviser’s development of the facts, and knowledge of the law and IRS procedure, will advance the likelihood of a successful outcome.”
Appealing a Trust Fund Recovery Penalty Assessment
A revenue officer notifies taxpayers if they’re responsible for a business’s employment taxes via a written notice. The taxpayer should respond to the notice within 60 days if he doesn’t believe he should be held liable. Your professional representative should craft a response that is rich with facts and supporting documents to explain your position. You have the right to a hearing in a court to lay out your side of the story.
Once the IRS receives the appeal, a few things can happen. They send Letter 4141 first, in most cases. This document informs the taxpayer that the IRS has received the appeal and assigned an Appeals Officer. This notice also provides more details about what to expect during the appeals process. Similarly, you may receive a notice in about 30 days or less with a date and time for the hearing. You may also receive a separate notice which lists the initial findings of the appeal.
At the conclusion of the hearing, you can expect to receive a notice that expresses your options. The taxpayer should respond to this notice as soon as possible. Further mediation is often the proper recourse in these cases. You certainly have the right to allow your adviser to navigate this process on your behalf.
Tax Champions and the Trust Fund Recovery Penalty
A Trust Fund Recovery Penalty can, above all, be an expensive liability. If the taxpayer doesn’t pay the employment taxes by the deadline furnished by the IRS, interest also starts to accrue.
Tax Champions absorbs the stress of a Trust Fund Recovery Penalty assessment. We roll up our sleeves and get to work on behalf of our client immediately. Furthermore, we have over 35 years of knowledge and skill in representing clients in Trust Fund Recovery Penalty cases. We thoroughly comb through your case to ensure that we use every existing resource in your defense.
In addition to handling your Trust Fund Recovery Penalty case, we offer an array of resources. Tax Champions will keep your personal and business finances in good health all year around for many years to come. While we take care of all tax issues, we also have extensive experience in small and big business finances. These services include tax planning, payroll services, and bookkeeping. We can also provide our clients with contract and tax estimations and more.
Take the First Step
For more information about how we can help you successfully navigate through a Trust Fund Recovery Penalty, contact us today. You can reach us toll-free at 800.518.8964. Another option is to submit your contact information in the blue box on the right side of this page. We’ll happily discuss your case for free and with no obligation.
One of our friendly and informed staff is standing by to take your call during the day and evening. We’re available seven days of the week, 365 days of the year. We understand how stressful a tax issue is for most taxpayers and therefore strive to be available at your convenience.
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Contact us today and sleep better tonight. A savvy and seasoned team of tax advisers is ready to work for you.
 26 U.S. Code § 6672 – Failure to collect and pay over tax or attempt to evade or defeat tax. (n.d.). Retrieved from //www.law.cornell.edu/uscode/text/26/6672
 Dunn, S. J. (2013, April 13). The Federal Trust Fund Recovery Penalty. Retrieved from //www.forbes.com/sites/stephendunn/2012/12/29/the-federal-trust-fund-recovery-penalty/#5e04b74b178c
 Employment Taxes and the Trust Fund Recovery Penalty TFRP | Internal Revenue Service. (2019, March 2). Retrieved from //www.irs.gov/businesses/small-businesses-self-employed/employment-taxes-and-the-trust-fund-recovery-penalty-tfrp
 Flynn, K. M., JD. (2017, November 27). The Trust Fund Recovery Penalty. Retrieved from //www.cpajournal.com/2017/11/28/trust-fund-recovery-penalty/
 Trust Fund Taxes. (2018, October 24). Retrieved from //www.irs.gov/businesses/small-businesses-self-employed/trust-fund-taxes