Trust Fund Recovery Penalty

It is possible to negotiate the Trust Fund Penalty with an Offer in Compromise but, it is not possible to discharge it in Bankruptcy.

The Trust Fund Recovery Penalty results from failure to pay payroll taxes.

The Trust Fund Recovery Penalty or "TFRP" for short isn't as difficult to understand as it may seem. Here is the breakdown to help you understand how it works:

Sometimes a business owner runs into financial difficulty and does not pay the withheld taxes... not because they are trying to evade, but because they simply can't pay money they don't have. Of course they did intend to catch up on the payroll taxes as soon as enough money came in, but the money never showed up.

When an employer withholds income tax and social security tax from an employee's paycheck, that money is supposed to be paid to the government by the employer. The income and social security taxes an employer withholds from the wages of employees are called "trust fund" taxes because they are in theory held in trust for the government.

The Trust Fund Penalty is a legal tool, a civil penalty, whereby the government can collect corporate tax from the business owner and responsible persons as individuals. The penalty provides a way to charge a corporate tax liability directly against any person who had responsibility for the unpaid payroll tax.

Confusion about how the penalty operates abounds. It sounds like the IRS can be paid multiple times... not so. The TFRP does not result in the tax being paid more than once because when the penalty is paid by an individual the corporate balance is reduced by a like amount. And just because all responsible parties are assessed the full penalty, IRS will only collect it one time, from whoever they can. Control may be the most important factor in determining who will be assessed but, the IRS will go after those with the deepest pockets first, not necessarily the most responsible. If you have personal assets, those assets are like bait for the IRS. Liens will be filed against all responsible parties.

The IRS is very aggressive in collecting unpaid payroll taxes and will try to collect unpaid payroll tax from anyone responsible for withholding and paying these payroll taxes to the IRS, including anyone in charge of running the company, financial decision makers and those handling financial accounting, payroll, or signing checks. It is surprising sometimes to find out just how far down the chain of command the IRS goes, sometimes right down to a very low paid bookkeeper. The IRS is quite willing to prosecute those who willfully fail to file payroll tax returns or to pay payroll taxes.

The IRS assigns Revenue Officers to collect payroll taxes and to investigate the financial strength of the business. Failure to correct a delinquent payroll tax could result in levies on company bank accounts, levies on those who pay the business or owe the business money, liens against property and general liens that will show up on the business's credit report. 

IRS aggressive collection activities will take a huge toll on the viability of the business by damaging important business relationships and management's credibility which is vital for continued operations.

Finally, the IRS can close the business and liquidate the business assets.  

A Trust Fund Penalty is an especially difficult problem for anyone who is assessed because, unlike income tax, it is a civil penalty and cannot be discharged in bankruptcy.

It is possible to negotiate the Trust Fund Penalty with the IRS with an Offer in Compromise.

If you would like more information, please contact me.

Ralph Sayers, CPA

(877) 316-4331

ralphs@tampabay.rr.com