The Trust Fund Recovery Penalty for willful withholding tax violations

The IRS aggressively assesses the TFRP against businesses and responsible persons for willful failure to meet withholding responsibilities.

The Trust Fund Recovery Penalty or TFRP is a potentially expensive civil penalty the IRS may assess against an employer or an affiliated responsible person for willful failure to properly withhold from employee paychecks certain taxes, deposit them into a qualified financial institution in the interim and pay them over to the IRS at the time and in the way the agency requires. A responsible person who willfully failed to meet withholding responsibilities could potentially be personally penalized in a significant amount.

Tax withholding

Payroll personnel or departments must see that appropriate amounts of certain taxes are withheld from employee paychecks, including federal income tax, Social Security or railroad retirement, and Medicare. The employer then in essence holds the tax money in trust for its employees until it is appropriately transferred to the IRS on their behalves along with required tax returns. This trust aspect of the transaction is how the penalty got its name.

Responsible persons

In addition to those more directly responsible for withholding, company owners, corporate officers and directors like CEOs and CFOs, partners and other high level employees with tax withholding oversight may be considered responsible persons for purposes of withholding tax violations. The IRS defines a responsible person as someone with the “duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.”

Even accountants, banks, insurers, sureties and bankruptcy trustees could be responsible persons, according to the IRS.

Willful failure

The question of willfulness can be hotly contested. The IRS views willfulness in this context broadly such as when someone acts “voluntarily, consciously, and intentionally …” It is also willful if the person knows the required actions are not happening and does nothing. Misappropriating withheld trust fund tax money for any other business purpose is also evidence of willfulness.

The agency states that indifference is not a defense to willfulness and also that “no evil intent or bad motive” is necessary.

Even when an employer outsources its payroll and withholding duties to a third-party payroll service provider or PSP, the employer or affiliated responsible parties could potentially still be liable for a TFRP if the PSP does not comply with federal withholding requirements on behalf of the employer.

The penalty

The IRS explains the TFRP as follows: “If trust fund taxes willfully aren’t collected, not truthfully accounted for and paid, or are evaded or defeated in any way, we may charge a trust fund recovery penalty … equal to the amount of the trust fund taxes evaded, not collected, not accounted for, or not paid to IRS.” Interest is also computed on any TFRP amount.

IRS enforcement

The IRS through specialized Revenue Officers actively enforces withholding requirements and assesses related TFRPs. This can mean collection efforts against the business itself and against responsible parties in their personal capacities. Collection can include seizure of assets and money or garnishment of wages. In extreme cases, the IRS may refer such matters for criminal investigation.

Executives and high level employees should take an active role in seeing that payroll withholding processes are properly carried out. Looking the other way or leaving the responsibility to others could be a costly mistake, even personally. Any questions about withholding responsibilities or the TFRP, including how to respond if the IRS is investigating a withholding issue, should be directed to a tax lawyer.

The attorneys at Brown, PC, in Fort Worth, Texas, represent and advise employers, their general counsel and executives of all industries, legal structures and sizes to resolve legal problems related to payroll taxes, withholding and TFRPs. Our clients are from the Dallas-Fort Worth Metroplex as well as across Texas and the nation.