Trust Fund Liability

The employer has been delinquent in paying its employment (941) taxes to the IRS. To the extent that these taxes represent that portion withheld from the employees' wages (i.e., trust fund taxes), the IRS can assess and seek collection from "responsible persons" in their individual capacity the amount of the unpaid trust fund taxes. Such liability is referred to by the IRS as the Trust Fund Recovery Penalty (“TFRP”). Potential responsible persons could be officers, partners, corporate directors, shareholders or employees of a business organization. If the IRS has classified you as a responsible person, you will be held jointly and severally liable for the outstanding trust fund taxes. The business does not need to have stopped operating in order for this liability to be assessed on you.

Who Can Be Responsible for the TFRP?

The TFRP may be assessed against any person who:

  • Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:
  • 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.

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).

Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

Figuring the TFRP Amount:

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.

Assessing the TFRP:

If the IRS determines that you are a responsible person, they will provide you a letter stating they plan to assess the TFRP against you. You have 60 days after the date of the letter to appeal the determination by filing a Tax Protest. Your case would then be assigned to an Appeals Officer for review. If you do nothing or fail to timely file a Tax Protest, the IRS will assess the penalty against you and send you a Notice and Demand for Payment. Thereafter, the IRS can take collection action against your personal assets including filing a federal tax lien or taking levy or seizure action.

By allowing us to analyze your situation and determine the best course of action, we should be able to formulate a strategy to settle this liability. For many taxpayers, this typically leads to an Offer in Compromise.

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