Employment Taxes and the Trust Fund Recovery Penalty (TFRP)
It is called “trust fund” because the company and its representative actually hold the employee’s money in trust until a federal tax deposit in that amount is made. In effect, the company is responsible for collecting or paying withheld income and employment taxes when it processes payroll, or for paying collected excise taxes.
If it willfully fails to collect or pay them, the TFRP may be assessed against any person who is responsible for this process. It can be for example an officer or an employee of a corporation, a member or employee of a partnership, a Payroll Service Provider.
This responsible person must or should have been aware of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to pay the employment taxes.
The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:
- The unpaid income taxes withheld, plus
- The employee’s portion of the withheld FICA taxes.
For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.
Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee’s function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid.
The IRS will determine who is the responsible person, and provide this person a letter stating that it plans to assess the TFRP against him (her). The person will have 60 days (75 days if this letter is addressed to you outside the United States) from the date of this letter to appeal the IRS proposal.
Once the IRS asserts the penalty, it can take collection action against personal assets. For instance, the IRS can file a federal tax lien or take levy or seizure action.
In Schiffmann versus United States, 117 AFTR2d 2016-386, the First Circuit Court of Appeals agreed with a Rhode Island Federal District Court and following the weight of authority determined that a CEO was responsible for unpaid payroll taxes prior to having knowledge because he used unencumbered funds to pay other bills after he learned of the unpaid liability.
I created this blog to help understand certain basic aspects of U.S. tax law. Of course, each situation is unique and nothing that is on this site will ever replace the expert advice of a tax professional.
Please do not hesitate to contact me should you have any question