Situations that often give rise to an IRS Trust Fund Recovery Penalty issue include companies in financial crisis, accounting or bookkeeping errors, or even embezzlement. And there is often great confusion about the IRS’s Trust Fund Recovery Penalty, sometimes referred to as a “civil penalty” or “TFRP.” Clients see the word “penalty” and believe they are being punished, which is not exactly true.
As a bit of background, there are generally three employment taxes: income taxes, FICA (which funds Social Security and Medicare), and FUTA (which funds Federal unemployment benefits). Employers are responsible for half the FICA taxes up to a certain amount, and the other half is deducted from an employee’s paycheck. Any unpaid income taxes withheld, plus an employee’s portion of the withheld FICA taxes comprise the trust fund which can be personally assessed against certain people.
The Trust Fund Recovery Penalty finds its statutory authority in Internal Revenue Code §6672, which states that:
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.
Thus a Trust Fund Recovery Penalty could be assessed against any person who: (1) is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes; and (2) willfully fails to collect or pay them.
So who is a “responsible person” for purposes of a Trust Fund Recovery Penalty? A person’s title is a company is not controlling, but a responsible person is usually 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 a nonprofit organization, another person with authority and control over funds to direct their disbursement, or another corporation. Responsibility falls to those who have the authority to decide which creditors to pay and when such payments should be made.
For willfulness to exist, the responsible person must have been, or should have been, aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. No evil intent or bad motive is required for the assessment of a Trust Fund Recovery Penalty. Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.
This information about what a Trust Fund Recovery Penalty is may be helpful to some. However this is for general information purposes only and should not be considered the rendering of legal advice. You should contact a tax professional if you have a Trust Fund Recovery Penalty issue.