Trust Fund Recovery Penalty
If Withholding Taxes, also commonly called “Trust Fund Taxes” or “941 Liabilities,” remain unpaid by a business entity, the IRS will aggressively pursue collection from “responsible” individuals involved in operating the business or who are otherwise involved in making business and financial decisions for the business. The IRS is authorized to “pierce the corporate veil” by assessing the unpaid Withholding Tax liabilities of a business directly against the individuals that are “responsible” for the company’s failure to properly withhold and pay over the Trust Fund Taxes. This individual assessment is called the “Trust Fund Recovery Penalty” (TFRP).
In general, the IRS is authorized to assess the Trust Fund Recovery Penalty against individuals involved in the business who have control over the use and disposition of a company’s assets, or otherwise have decision making authority in connection with the payment of the company’s liabilities, and who also “willfully” fail to pay the company’s Trust Fund Taxes. The IRS’s right to assess the Trust Fund Recovery Penalty is a legal issue dependent on applicable law and the individual facts and circumstances of a case.
Although generally applicable to the owners and principal officers of small and closely held business enterprises, many IRS Revenue Officers paint the Trust Fund Recovery Penalty with a broad brush. In addition to the owners and principal officers, IRS Revenue Officers will often assert the Trust Fund Recovery Penalty against all individuals involved in the accounting aspects of the business or who have check signing authority. Many times, Revenue Officers, unsupported by the facts and applicable law, will assess the Trust Fund Recovery Penalty against company bookkeepers and accountants, other individuals who have been named as officers for “convenience” but who have no actual authority or control over the business, the spouses or other relatives of principal owners, and key company employees who have no control over the financial aspects of the business.
Unfortunately, assessment of the Trust Fund Recovery Penalty can create a difficult problem. The Trust Fund Recovery Penalty is often a very large amount and cannot be discharged in a bankruptcy. Once the penalty has been assessed against you, it can jeopardize your home or other property, ruin your credit rating, and interfere in your family life. If you are the potential target of an IRS assessment of the Trust Fund Recovery Penalty, or have been notified by the IRS that you will be interviewed in connection with the Trust Fund Recovery Penalty, the time to act is now.
On many occasions, our firm is retained to solve a Trust Fund Recovery Penalty problem months, or even years, after it has been assessed. This generally happens after the IRS has commenced enforced collection activity for an “old” Trust Fund Penalty liability, or a taxpayer is prevented from selling or refinancing his or her house due to a federal tax lien filed in connection with the original Trust Fund Recovery Penalty assessment. The potential solutions are varied and complex, and require skilled representation. At times, an offer-in compromise or request for lien discharge or subordination will be the answer. Sometimes the solution requires payment of the withholding tax for one employee, followed by a claim for refund. Sometimes the problem can be resolved through IRS administrative appeal procedures; and sometimes, the solution lies in federal court litigation. In all cases, an attorney experienced in representing taxpayers in Trust Fund Recovery Penalty cases should be consulted.