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An Overview of the Trust Fund Recovery Penalty

October 5, 2020
Weisberg Kainen Mark, PL

There’s been much discussion lately about payroll taxes, deferral, and (possible) forgiveness, whether temporary or permanent. While the situation and conversation surrounding payroll taxes remains fluid in D.C., one of the two certain things outlined by prescient founding father Ben Franklin also remains: you must pay your due to the IRS. 

In the context of payroll taxes required to be withheld from employee paychecks, small business owners, shareholders of corporations, and other “responsible” persons could be personally liable if these taxes are not withheld and remitted to the IRS. The consequences of not remitting FICA taxes and other tax obligations from employees’ paychecks to the federal government could result in the IRS assessing the Trust Fund Recovery Penalty (TFRP) against a company’s responsible person. 

Are You a ‘Responsible Person’? 

According to the IRS, someone has to be responsible for withholding payroll taxes from employees’ paychecks, placing the money into a trust fund, and remitting that money to the federal government. The IRS’ official designation for this individual (or individuals) is the “responsible person.” In addition to being responsible for “collecting, accounting, and paying of trust fund taxes,” the responsible person must be willful in their failure to pay the trust fund taxes. 

To determine the responsible person, the IRS will conduct what is commonly referred to as the 4180 interview. After conducting these interviews, the IRS representatives fill out Form 4180 and notify the affected persons. 

How is Willfulness Defined in This Context?

The key factor in many IRS penalties is whether or not the taxpayer who allegedly didn’t complete his or her tax obligations was “willful” in the failure to pay. The TFRP is no exception. To determine whether willfulness existed, two factors must be present:

  • The responsible person “must have been, or should have been, aware of the outstanding taxes”
  • The responsible person was either “plainly indifferent” to the law or “intentionally disregarded” it. 
Not Dischargeable in Bankruptcy

The aspect of the TFRP most responsible persons worry about is being personally liable for the trust fund taxes. The trust fund portion of employment tax liabilities do not disappear if the business entity folds; it merely passes to the responsible person. Additionally, trust fund taxes are not eligible for discharge in personal bankruptcy. 

Weisberg Kainen Mark, PL Can Help

Once you’ve received a notice from the IRS that the TFRP is going to be assessed on you, there is a limited amount of time (60 days in most cases) to appeal. Even if an appeal is not successful, there is plenty of strategic planning our firm can assist you with. Weisberg Kainen Mark is here to help individuals and businesses resolve their tax disputes efficiently. Call us at 305-374-5544 to see how we can help.

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Weisberg Kainen Mark, PL

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