The Trust Fund Recovery Penalty (“TFRP”) relates to employment taxes (IRS Form 941) due by an employer to the IRS for wages paid to its employees. It is the employees’ portion of income tax, Social Security, and Medicare, withheld by the employer from employees’ wages. Although referred to as a penalty, it is a tax.
When an employer does not make required federal tax deposits for employment taxes, it incurs a tax liability comprised of the Trust Fund and non-Trust Fund (the employer’s share of Social Security and Medicare) portions of the tax. The Trust Fund portion can be assessed against individuals, including employees of the business, if not paid in full.
Section 6672 of the Internal Revenue Code (and corresponding Treasury Regulations) provides authority for the assessment and collection of the TFRP against any “responsible person.” That is any person who was responsible for collecting and/or paying the Trust Fund portion of the employment taxes to the IRS, and who willfully failed to collect and/or pay them. Willfulness generally means the person knew or should have known of the obligation to collect and/or pay the tax and intentionally disregarded it (perhaps by paying other creditors, including wages to employees) or had no concern for the obligation. It can be an officer, shareholder, director, employee, or even a payroll provider (this is not an exclusive list).
Whether a person is “responsible” for the TFRP is a highly factual analysis, requiring review of the duties and roles of various people within the organization, relevant to the periods of any unpaid employment taxes. If it is ultimately determined a person is responsible for the TFRP, the IRS can assess it and begin collections against the individual or individuals. While the IRS can collect the TFRP only once, this law allows the IRS to collect from numerous sources—the business and all responsible persons. Any payments made toward the TFRP by either the business or any responsible person reduces the TFRP balance as to all.
Taxpayers often are confused by the TFRP because they believe it is a penalty they have to pay, in addition to the employment taxes the business is paying. Instead, it is a portion of the employment taxes the IRS may be able to assess and collection from numerous sources, ensuring it gets paid as quickly as possible. Of course, if the TFRP is paid (first, before the non-Trust Fund portion of the employment taxes), there will be no balance to assess against a responsible person, so getting that paid as quickly as possible may often be the best solution.
If you have questions, contact Anderson & Jahde for competent, professional tax help.