One of the worst business tax penalties to deal with is the Trust Fund Recovery Penalty (TFRP). This isn’t just because it’s one of the larger potential penalties or the fact that it’s not typically dischargeable in bankruptcy proceedings. Rather, it’s the fact that the IRS can potentially collect unpaid trust fund taxes from individuals, thanks to Section 6672 of the Internal Revenue Code.
This personal liability doesn’t include just the owner or chief executive officer (CEO), but anyone responsible for the nonpayment of employee payroll and income tax withholdings – that includes employees.
The key to determining if you’re personally liable for the TFRP is whether or not you were a “responsible person” concerning the nonpayment of trust fund taxes. But what exactly is a responsible person within the TFRP context, and how does the IRS decide if you’re responsible? This blog post will aim to answer those questions.
Key Takeaways
- The Trust Fund Recovery Penalty (TFRP) is problematic given its size and the fact that individuals responsible for the penalty may have to pay for it with their personal assets.
- Anyone whom the IRS identifies as a “responsible person” could be personally liable, even if they weren’t a CEO or business owner.
- The TFRP recovery process may begin with the IRS requesting a Form 4180 interview to identify potentially responsible individuals.
- The IRS will also send Letter 1153 to those it believes are personally responsible for the TFRP.
- If you get a Letter 1153 or the IRS asks you for a Form 4180 interview, you should first consult with a tax professional, given the factual and legal complexities involved.
Who Is a Responsible Person for Trust Fund Recovery Penalty Purposes?
If the IRS believes someone should pay the TFRP, the IRS must prove two elements:
- First, the person was responsible for the nonpayment of the trust fund taxes.
- Second, that the nonpayment was the result of one or more willful actions.
The Responsibility Element
This condition is why TFRP liability can sometimes go beyond the CEO or owner and doesn’t depend on just a person’s job title. A person is deemed responsible if they have the duty and authority to collect and pay trust fund taxes. How the IRS determines this depends on an examination of the totality of the circumstances, which means analyzing various factors, such as whether the person:
- Had an ownership stake in the business.
- Was on the board of directors.
- Had managerial duties relating to daily business operations.
- Possessed the power to hire and fire employees.
- Could decide which business debts to pay and when.
- Had control over business bank accounts.
- Engaged in collecting and paying taxes (such as withheld income and employment taxes of the employees) for the business.
None of these factors is dispositive by itself, but the more factors that are present, the more likely the IRS will conclude someone is responsible for paying the TFRP. It’s possible for there to be more than one responsible person, and the following is a list of specific individuals that could potentially be considered “responsible” by the IRS:
- Corporate officer
- Shareholder
- Member of the board of directors
- Partnership member or employee
- An individual from a payroll service company
- Payroll manager
- Bookkeeper
- Comptroller
- Controller
Remember, however, that responsibility is not based on your job title; it’s based on your duties and role in the company.
The Willfulness Element
A person will have willfully ignored their trust fund collection or payment obligations if both of the following two conditions exist:
- They knew (or should have known) about the unpaid trust fund taxes.
- They intentionally ignored the law or were “plainly indifferent” to the law concerning trust fund taxes.
A person has acted willfully if they choose to pay other creditors or third parties instead of the IRS. Willfulness can also exist if a person is informed about the unpaid trust fund taxes and takes no steps to further investigate and correct the omission.
Remember, to be a responsible individual, you must act willfully and have the power to do the right thing. So, a boss telling you to mail a check to a creditor instead of the IRS, even though you know there are unpaid trust fund tax obligations, doesn’t make you subject to the TFRP unless you also had the power to send a check to the IRS instead of that creditor. However, this particular scenario can vary if you are a licensed tax professional who should know better than to accept that type of direction.
The TFRP IRS Process
If the IRS believes you or someone else is a responsible person, and therefore possibly subject to the TFRP, they’ll usually start an investigation. This often begins with the IRS requesting a Form 4180 interview.
Form 4180 Interview
The purpose of this interview is for the IRS to identify (and in many cases, confirm) who the responsible people are for the nonpayment of trust fund taxes. Before this interview, the IRS will send Form 4180, which lists the questions the IRS revenue officer intends to ask the person being interviewed.
These can be stressful meetings, and the facts of your case should determine whether or not you should agree to attend a Form 4180 interview. This is a difficult decision to make on your own, given the factual nuances and uncertain financial and legal consequences that could follow. If the IRS asks you for one of these interviews, it’s strongly recommended that you consult with a tax professional with TFRP experience.
Getting a Letter 1153 From the IRS
After the IRS determines who they believe is responsible for the TFRP nonpayment, they will send each suspected responsible individual a 1153 letter. The IRS takes a broad approach to who gets these letters. Therefore, getting this letter doesn’t automatically mean you’re a responsible person for TFRP purposes.
However, the burden is on you to file an appeal if you disagree with the IRS. If you agree, then you can sign Form 2751 that comes with Letter 1153. After you sign Form 2751 and send it to the IRS, the IRS sends you a bill to pay the TFRP.
Appealing a 1153 Letter From the IRS
If you want to challenge the TFRP, you have 60 days from the date of the Letter 1153 to file an appeal. If Letter 1153 was addressed to you outside the United States, then you have 75 days. How you submit your appeal depends on the size of the proposed TFRP.
If the amount is $25,000 or less, you can choose between filing a small case request or filing a formal written protest. If the amount is greater than $25,000, your only option is to file a formal written protest. Your 1153 letter should provide the steps necessary for filing an appeal, but the following is an overview of what you can expect.
For a small case request, you’ll complete IRS Form 12203, Request for Appeals Review. Alternatively, you can write a written statement stating:
- What you disagree with.
- Why you disagree.
- The evidence you have in support of your position.
- You want to schedule an appeals conference.
You’ll also want to attach a copy of Letter 1153 to your small case request.
For a formal protest, you’ll want to gather and prepare the following:
- Your name, address, and daytime phone number.
- Identification of all areas of dispute, including the applicable tax years, what you disagree with, facts to support your position, legal authority to support your position, your proposed changes, and a sworn declaration affirming that, under penalty of perjury, the information you’re providing the IRS on appeal is true, complete, and correct.
Regardless of which approach you take, you’ll be presenting one or both of the following defenses:
- You didn’t have the authority, duty, and/or power to engage in activities relating to the collection or payment of trust fund taxes, such as writing checks or prioritizing business debt payments.
- You were neither aware of the unpaid trust fund taxes nor were you in a position to know about their lack of collection or payment.
Your strongest position is to argue both, but even if you can only successfully argue one of the above, you should still be successful in your appeal.
Get Professional Tax Help When Fighting TFRPs
Trust fund tax penalties are serious, given the amount of the penalty and the potential for personal liability. This means possible IRS collection activities such as tax liens and levies of your personal assets (asset seizure). And if you or someone at your business is deemed to be liable for this civil penalty, depending on the facts of your case, there’s a chance criminal tax fraud charges are also a possibility.
The moment you get a 1153 letter or Form 4180 interview request, contact an experienced tax professional, such as a tax attorney from Damiens Law.
We can help determine your risk of personal liability or criminal charges, assist when responding to Letter 1153, and prep you for a Form 4180 interview (if applicable). If it turns out you owe the TFRP, we can also advise you on ways to protect your personal assets and limit your financial exposure. Schedule a free consultation today by contacting us.
Personal Liability for IRS TFRP FAQs
Can I be a “responsible person” even if I didn’t sign checks?
You certainly could. The IRS will consider multiple factors when deciding if you were a “responsible person” for TFRP purposes, and check-writing authority is just one of those factors. No single factor decides responsibility, and the IRS will instead take a totality of the circumstances approach.
What’s the difference between “willfulness” and “responsibility” for TFRP purposes?
Both of these must exist for TFRP personal liability to apply. Responsibility relates to an individual’s duty and/or power to ensure that trust fund taxes are collected and paid to the IRS.
Willfulness relates to knowing (or being in a position where someone should have known) about the trust fund tax responsibility and either intentionally ignoring or being blatantly indifferent to the legal obligation.
What should I do if I receive IRS Letter 1153?
If you agree with the letter, you can sign IRS Form 2751 and pay the trust fund penalty. If you disagree with Letter 1153, you can file an appeal to contest the assessment.
Can multiple people be responsible for the TFRP?
Yes. The IRS can recover this penalty from you, anyone else held responsible, and/or the business itself. TFRP liability can be joint and several, meaning the IRS can go after a single person for the entire penalty, even if multiple individuals were responsible.
If you end up paying more than your fair share of the TFRP, then you have the legal right to seek contribution from any other responsible parties who haven’t paid their proportional share of the penalty.
Is the trust fund recovery penalty dischargeable in bankruptcy?
It’s unlikely. In most cases, neither the TFRP nor the trust fund tax debt is dischargeable in bankruptcy.
If my business can pay the unpaid trust fund taxes to the IRS, can I avoid the TFRP?
Maybe. The IRS will sometimes forego TFRP collection from an individual if it can promptly recover the unpaid trust fund taxes from the business. There’s also the possibility that the business itself might pay the TFRP.
Sources
– https://www.irs.gov/businesses/small-businesses-self-employed/employment-taxes-and-the-trust-fund-recovery-penalty-tfrp
– https://www.thetaxadviser.com/issues/2020/oct/tfrp-crisis-business-owners/
– https://www.thetaxadviser.com/issues/2017/jun/trust-fund-recovery-penalty-llcs/
– https://www.irs.gov/individuals/international-taxpayers/federal-unemployment-tax
– https://www.irs.gov/businesses/small-businesses-self-employed/trust-fund-taxes
– https://www.law.cornell.edu/wex/trust_fund_recovery_penalty_(tfrp)
– https://www.irs.gov/publications/p15
– https://www.irs.gov/irm/part5/irm_05-019-014r
– https://www.thetaxadviser.com/issues/2013/apr/petra-apr2013/
– https://www.irs.gov/irm/part8/irm_08-025-001
–https://misea.org/images/downloads/MiSEA___November_2018_Education_Event/how_to_handle_a_4180_interview_2018_mi_nov_2018.pdf
– https://www.irs.gov/pub/irs-pdf/p5.pdf
