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Trust Fund Recovery Penalty (TFRP)
The Trust Fund Recovery Penalty is associated with the failure to pay “payroll” taxes. Payroll taxes refer to the Social Security tax and the Medicare tax. Social Security taxes are designed to provide benefits for retired workers, the disabled, and the dependents of both. Medicare taxes are designed to provide medical benefits for certain individuals when they reach age 65. Federal income taxes, compared to payroll taxes, are used to pay for national programs such as national defense, community development, and law enforcement.
Failing to properly file and pay payroll taxes is a serious matter. If the employer fails to timely file and pay payroll taxes the IRS is authorized to collect these taxes from the business or even a person or persons who are responsible for withholding and paying these payroll taxes to the IRS. The IRS typically employees Revenue Officers to work on collecting payroll taxes and to investigate the financial health of the business. Failure to correct a delinquent payroll tax matter could result in the closure of the business and liquidation of the business assets.
In situations where a corporation incurs a payroll tax liability, and the IRS is unable to collect the taxes from the entity itself the IRS may seek to collect the payroll taxes from individuals within the corporation. To accomplish this objective the IRS will interview different individuals of the corporation to identify who should be assessed the Trust Fund Recovery Penalty (TFRP). An individual is not responsible for a corporate payroll tax liability unless the IRS assesses a TFRP. This is also referred to as a 100% civil penalty. The TFRP is the amount equal to the tax that an employer withheld or should have withheld from employees’ wages and failed to pay over to the IRS. It is important to note that payroll taxes and this penalty cannot be discharged in bankruptcy.
When the IRS tries to identify who should be assessed this penalty and made personally liable for the tax, the IRS looks to see who was responsible and willfully failed to pay the federal payroll taxes. The IRS is suppose to conduct a formal interview called a Form 4180 interview to determine if they are personally liable. The liable person is only responsible for the TFRP amount and not both the TFRP and the payroll tax amounts.
The IRS looks at many factors in determining whether someone is responsible for a payroll tax liability. However, one of the most important factors is control. Generally, the IRS considers anyone who has the authority to sign checks or the authority to operate the business on a day-to-day basis as someone who would have control over the business sufficient to assess a TFRP. Therefore, owners, officers, and executives may be considered responsible parties.
Generally, the IRS assesses a TFRP after a corporation has closed. Also, generally, the IRS has three years from the date of the tax assessment to assess the penalty against an individual. If the IRS does not assess a TFRP during the three years, the IRS is generally barred from making the assessment against an individual.
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Source: RoniDeutch.com
