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November 13, 2015


It’s about trust: the Trust Fund Recovery Penalty

The word “trust” has a lot packed into it. Broadly, of course, it refers to belief or confidence in the reliability or faithfulness of a person or an organization. But in legal terms, a trust is a legal mechanism by which certain property rights are held by one party to benefit another.

In tax law, there is also an even more specific use of the word “trust” that occurs in the context of employment taxes. Employers are required to withhold and pay over to the federal government certain taxes such as Social Security taxes that are designated as “trust fund” taxes.

If an employer fails to do this, the IRS may seek to impose something called the Trust Fund Recovery Penalty (TFRP). This penalty is directed against certain individuals who are considered to be responsible for withholding and paying over those taxes – and therefore personally liable when something goes wrong.

In our recent article on when the IRS can seek to impose this penalty, we noted that the IRS uses an expansive definition of which individuals are considered “responsible parties” for TFRP purposes.

For example, it isn’t only officers and directors of a company with clear authority over payroll tax compliance who could potentially be subject to the TFRP. The IRS takes the position responsible parties could also include third parties who are called upon by an employer to handle payroll tax administration.

In short, if you are entrusted with control over payroll taxes and they don’t get withheld and paid over properly, you could face the FRP. The IRS is known to pursue this penalty aggressively, and it is not dischargeable in bankruptcy.

It is therefore important to get knowledgeable legal counsel regarding payroll tax compliance problems. You don’t want to take it on the chin – in the form of a Trust Fund Recovery Penalty – just because the IRS said you were so responsible and trustworthy.


Tax Controversy