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TFRP: When the IRS uses it and how it works

On Behalf of | Mar 14, 2023 | Employment Tax Law |

The Tax Code and additional Congressional action have given the Internal Revenue Service (IRS) many different tools to come after employers as well as those they consider responsible parties who fail to withhold and remit employment taxes. One such example is the Trust Fund Recovery Penalty (TFRP).

What is the TFRP?

The TFRP provides the IRS with the ability to hold anyone who is responsible for collecting these funds liable for failing to remit payment to the IRS as long as the IRS can establish the responsible individual was willful in their failure to collect or remit the funds. It is also known as the “6672 Penalty” named for the IRS Code Section.

Unfortunately, willfulness is not as difficult to establish as we may think. The government can find success arguing the individual knew or “should have known” of the obligation and still failed to act.

When does the IRS use the TFRP?

The IRS will move forward with this penalty when there is a balance due by the business and payment is not being remitted timely. There will be at least one person that the government will hold liable for the failure to withhold and/or remit this tax. It will look to multiple people if possible as the collection of this tax is divisible. The government only needs to establish that the responsible individual knew or should have known that the obligation existed and they nevertheless failed to remit the tax and/or made any attempt to evade this obligation.

How will I know if I am the subject of a TFRP?

The IRS will most often conduct a 4180 interview with persons of interest and then decide based on the same. If you happen to have bank signature authority or are responsible for payroll you could be questioned along with the owner(s) of the entity where you work. After the interview (4180), the IRS will send a letter as to the Revenue Officer’s recommendation of assessing the TFRP and provide 60 days from the date of the letter to allow for an appeal.

How serious is the penalty?

The IRS can hold the responsible party accountable for 100% of the employment taxes that are not withheld and/or not remitted of the company’s employees. It is a joint and several liability, so even if the company pays, the IRS can still come after the responsible party for that portion that remains outstanding. Should an assessment be made, the responsible party’s personal income and assets maybe collected upon to satisfy the liability.

Unfortunately, the employment tax obligation is just the beginning. One can be looking to multiple violations that can also include a failure to report, a failure to remit and intent to evade. For example, a failure to withhold and pay employment taxes is also a felony and can lead to up to a $10,000 fine and the potential for up to five years imprisonment. In these cases, the prosecution is also likely to look for evidence of tax evasion which can result in a fine of up to $100,000 for individuals and five years imprisonment.

What if my business is going through bankruptcy?

It is not uncommon for the business that is the subject of the TFRP be in the process of filing for relief through bankruptcy. However, those who are going through bankruptcy should know that there are TFRP taxes are not dischargeable, leaving you on the hook for the assessed TFRP.

What should I do if the IRS deems me a “responsible party” for the purposes of a TFRP?

It is important to follow the appeal process noted above. This generally begins with a discussion of the proposed penalty with the Revenue Officer’s group manager, a request for Fast Track Mediation (FTM), or the filing of a written protest. It is imperative that you pay attention to the date of the letter proposing assessment and that you file your appeal timely—even if you are in discussions with the IRS. You do not want to lose valuable rights, especially if you do not believe you owe the tax.