The Trust Fund Recovery Penalty is one of the more severe tax penalties handed down by the IRS and is one of the few times the IRS can disregard a corporate structure and seek payment of the tax and penalties from individuals in the corporation.
Most employers know they are required to withhold taxes from their employee’s wages. They must withhold federal income tax, Social Security and Medicare taxes on behalf of the employee. The employer is then required to pay the taxes over to the IRS, usually on a quarterly basis. Because the funds withheld are owed to the IRS by the employee, it considers the employer’s withholding of them a trust fund for the benefit of the IRS.
The Penalty
If the employer does not pay over the amounts withheld to the IRS, or the amounts that should have been withheld, the employer is liable for not only the taxes, but an amount equal to the taxes as a penalty. This is commonly referred to as the “100% penalty”. In addition, if failure to pay is willful and deliberate, criminal penalties are possible.
The IRS normally has 3 years from the date a return is filed or assessed, whichever is later. The IRS normally has 10 years to collect a delinquent tax, including the TFRP. Sometimes, the 10 year period can be extended.
Responsible Parties
The TFRP is one of the few taxes or penalties that can “pierce the corporate veil”. This means the IRS can seek collection from individual officers, directors, shareholders and employees of a corporation. The rule also applies to limited liability companies and partnerships. The IRS has the authority to seize personal assets of these individuals.
Responsible persons are those individuals the IRS deems to have “significant control” over the company’s finances. Individuals can be responsible for the tax, even if they were not aware of the nonpayment, if the IRS determines the individual should have known of the delinquency.
Representation in a TFRP Collection Matter
If a person is a member of a corporation that is becoming subject to a Trust Fund Recovery Penalty, it is important that they obtain representation as soon as possible from a tax attorney experienced in dealing with the IRS. Deadlines to respond to the IRS may be as little as 60 to 90 days, so obtaining quality representation must be done as soon as possible.
Because the IRS may seek payment from individuals, it may be beneficial, or necessary, for an individual to obtain their own representation, outside of corporate counsel. Defenses to a claim of being a responsible party for TFRP collections often exist, and it is important that an individual chooses representation that will fight for their interests.
Utah Tax Resolution attorney Jim Gilland has helped troubled tax payers resolve their IRS tax debt and TFRP issues all across Utah. Serving the entire Utah area including Salt Lake City, Ogden, Saint George, Logan, Provo, Clearfield and Layton.
