Trust Fund Recovery Penalty (TFRP) – Everything You Need to Know

The Trust Fund Recovery Penalty (TFRP) is an IRS priority enforcement area. Non-compliance can lead to penalties and even jail time.

If you own and run a company or a business with employees, you may have the potential of facing the Trust Fund Recovery Penalty (TFRP). It applies to the income taxes and FICA that you need to withhold from the wages of your employees. You need to keep these taxes in trust until you have to process the tax deposits during the tax season. 

Hence, whenever you violate the tax laws of the country by not paying the trust fund taxes on time, you’ll face the penalty that’s usually quite large, and keep in mind that the IRS has now become more aggressive in reinforcing this penalty to all taxpayers. In addition, since dealing with the Trust Fund Recovery Penalty is sometimes exhausting and a little bit complicated, we’ve gathered all of the necessary information below to significantly help you avoid this penalty in the future. 

What is a Trust Fund Recovery Penalty?

The IRS Trust Fund Recovery Penalty is a fine that employers need to pay when they are proven guilty of keeping the income taxes and FICA or Federal Insurance Contribution Act from the employees’ paychecks. They collect these taxes and put them in a trust. Then, during the tax season, the IRS will need these to be processed and paid on a particular schedule. However, if the employers use these taxes instead of putting these funds in the trust, that’s the time when the IRS will charge them with Trust Fund Recovery Penalty, which has the same amount as the withheld taxes. 

Hence, if the total amount that the employers used is $50,000, the IRS will require them to process the tax returns of  $50,000 plus another $50,000 for the penalty. The IRS is taking serious action against those people committing this particular violation. Therefore, if you’re proven guilty of doing it, the agency won’t have any second thoughts to take your personal investments and assets for you to settle the appropriate returns and pay for your penalty. Don’t forget, the IRS has up to three years to audit your return (six years if they suspect fraud or substantial underreporting).

How Does the IRS Assess Trust Fund Recovery Penalty?

If the IRS notices that a particular company doesn’t pay trust fund taxes, the agency will send an officer to figure things out and know who is responsible for the violation by initiating an assessment. The IRS will now collect relevant documents and tons of information about the said company. It includes canceled checks, bank statements, and the like. 

The agency will also need to know the details about the password of the online accounts and the employees who have access to them using the PIN. The purpose of doing it is for the IRS to know who controls the money of the company, who’s paying the bills, and to see how they spend their funds. After that, when the officer finds out who is responsible for committing the violation, the IRS will then request to conduct an interview with them. But there are ways to avoid the dreaded 4180 trust fund recovery penalty interview.

Who Can Be Held Responsible for Trust Fund Recovery Penalty?

The IRS will impose the Trust Fund Recovery Penalty assessment against someone who intentionally fails to collect the trust fund taxes and pay them on time and is responsible for paying and collecting employment and income taxes of the employees or for the excise taxes getting settled in the agency. The responsible person is the one who has the responsibility and duty to collect, account, and pay trust fund taxes of the company or corporation in the IRS. That person can be the following. 

Owners/CEOs/Employers

These people possess the right to choose those who can help them manage and run the business or company in the market. They also have control over all of the processes in different departments where their employees are working for them and even selecting the system they are using every day. Because of that, they may condone some unlawful activities that their employees are doing, or they may even take part in it, which can result in them being responsible for the unpaid trust fund taxes. In addition, when these people face a financial crisis, they tend to be tempted to use the funds for various reasons. 

Employees

Employees, or the employees with higher positions, can be held responsible because they have an active position in the company or corporation in seeing the processes of payroll withholding taxes and witnessing the procedure of carrying the task within the financial or payroll department. 

Third-Party Payroll Service Providers 

These are the people outside the company that some employers or owners of the company or corporation hire to process the paychecks of the employees. Others have a few unsatisfying experiences with them for not reporting the full amount of the payroll and even the taxes owed. 

Members of the Board of Trustees

A board of trustees is a group of people, either elected or appointed, who have the responsibility to manage a particular organization. The board is a governing body that aims to provide the best interest of the stakeholders in whatever decision of the management. Because of that, members of the board of trustees have the potential to be held responsible for the unpaid trust fund taxes due to their access to the organization and the duties they need to perform. 

Bookkeepers/Accountants 

Bookkeepers and accountants make sure to provide the updated and accurate financial information of the companies or corporations. Hence, they can also be held responsible for the unpaid trust fund taxes when they don’t honestly account for and report the contributions from the employee’s wages. Besides that, bookkeepers may also have some tasks with the accountants, like preparing and reporting the company’s tax returns and yearly or quarterly financial reports. 

Stakeholders of Corporations 

The stakeholders help the corporations meet their objectives and achieve their goals through the contribution of their knowledge, skills, and experience towards the success of the corporations. They also support every project and provide the necessary resources to make every endeavor of the company successful. 

Hence, since they are part of the decision-making process in the corporations, they also have the potential to be held responsible for the delinquent trust fund taxes. Either internal or external stakeholders, everyone is given the right and opportunity to participate in and take part in every project of the corporations that can lead to being tempted to use the trust funds intended to be deposited during the tax season in the IRS. 

The key to identifying the responsible person for the unpaid trust fund recovery is the level of access and control over the management of finances and payments in the company or corporation. That’s why looking at the title alone doesn’t give you enough information to prove who is responsible. Because of that, the IRS will conduct a thorough investigation and gather all of the necessary details to help find the true responsible people for the unpaid taxes. 

Trust Fund Recovery Penalty Amount and Calculation

irs trust fund recovery penalty

As mentioned earlier, the amount of the Trust Fund Recovery Penalty is the same as the total amount of the withheld trust fund taxes. For example, a particular employer withheld a total of $100,000 income taxes and the Federal Insurance Contribution Act from his employees’ paychecks. If proven guilty of the violation after the investigation, the IRS will require the employer to settle the owed taxes of $100,000 plus another $100,000 for the Trust Fund Recovery Penalty. Hence, the penalty is based on the withheld FICA that the employees have contributed and the total withheld income taxes that have not been processed yet in the IRS.

What Happens After IRS Assesses a Trust Fund Recovery Penalty?

If your TFRP assertion gets approved, your case will be handed over to a particular collection branch at the service center to proceed with the next process. You’ll then receive a Letter 1153, with Form 2751, to let you know about the penalty’s proposed assertion and to give you the opportunity to process a protest letter, requesting a conference in the Appeals Office. However, 60 days after sending the letter, there will be no more assessment unless you will agree to it and waive the 60-day period. 

Moreover, you have to mail your protest letter to the IRS on or before the 60th day after mailing the Letter 1153 to your address. Besides that, your protest will be informal if your proposed TFRP is less than $10,000, and if it’s more than that amount, your protest should also meet a particular set of requirements. 

After sending your protest letter, a revenue officer will review it carefully to see if it lacks some of the necessary details and information. If so, he or she will send it back to your mailing address with the transmittal letter, containing everything you need to provide to make your protest complete. Then, you’ll be given 45 days to comply and submit all documents and additional information so the revenue officer, who handles your case, will process your appeal request on time and forward your case to the appeals office. 

What is a TFRP Interview?

There are a lot of things that you need to know and understand about the process of the interview. It aims to find out if you’re truly responsible for the withheld taxes or not. Besides that, since the IRS officer will ask you questions from Form 4180, the form intended for TFRP cases, the said interview is also called a Form 4180 interview. However, dealing with it can sometimes be stressful and exhausting, but you can check other helpful ways for you to avoid it in the future. 

Is there a way to avoid the TFRP Interview?

One way to avoid the 4180 Interview is when you apply for a settlement or attempt to process setting up your payments by filing Form 2751, which is the proposed assessment of TFRP. Besides that, if your bill is less than $25,000, you can settle it within the period of 2 years or 24 months. You only have to set up the payment by linking it to your direct banking institution so that you can qualify for this particular arrangement. On top of that, if you’re liable for the violation, you can go ahead and pay the bill, so you can just simply cancel the 4180 Interview. 

However, if you’re not the responsible party for the withheld taxes, it can be difficult but you can argue your liability with the IRS. Besides that, you may also need to hire an expert and experienced attorney who can handle this particular case. In addition, if you also don’t have the money to pay the IRS bill at the moment, you may file Form 433A to avoid the TFRP interview. 

It’s the same form you need to use if you want to apply for the settlement of your personal tax obligations. Filling out the said form, you have to submit all of the necessary documents to prove that you can’t pay your bill now in the IRS. It may include your mortgages, bank statements, credit cards, utility bills, and many others. 

What is the Statute of Limitations on Tax Fund Recovery Penalty

trust fund recovery penalty statute of limitations

There’s a particular statute of limitations of the TFRP assessment in the Internal Revenue Code. It includes the assessment of the said penalty by three years from filing the withholding taxes or three years from the 15th of April of the following year of the withholding tax quarter. But it needs to have close attention to the evidence and facts when determining the actual bar date for the assessment. 

Hence, the entire assessment period can be extended in various ways, depending on the circumstances. The events that the statute can extend include the bankruptcy of the responsible party for the violation, Form 2750 execution, and the Letter 1153 issuance. However, the events that can’t be extended by the statute on the Trust Fund Recovery Penalty include the corporation bankruptcy and the filing of the Offer in Compromise program. 

Settling the Penalty

You have various options to settle your penalty, whenever you’ve proven to be guilty of committing the said tax violation. If you don’t have the money to pay the IRS bill, you can apply for an installment agreement or any particular payment plan available. All you need to do is to contact the IRS as soon as possible to set up the payment arrangement that will work best for you.  

Penalty Abatement

The policy of the IRS is to collect the unsettled and owed trust fund taxes. The agency will abate the TFRP assessment if the corporation or the employer pays the delinquent taxes after asserting the TFRP. Moreover, the refund will be processed if the total amount collected from one or more people responsible for the withheld trust fund taxes on TFRP is more than what the corporation or employer failed to settle in the IRS.

Offer in Compromise

The IRS has the Offer in Compromise program that helps the taxpayers pay their taxes less than the actual amount by making an offer. Then, if the agency accepts your offer, that’s the only amount you need to pay and you’ll then have a clean record on your account, as long as you will always comply with the tax laws for five consecutive years. Besides that, you also have to meet a particular set of requirements before taking advantage of this program. Generally, taxpayers’ offers get approved if they have serious issues with their finances. 

Trust Fund Recovery Penalty Appeal Letter

If the IRS finds out that you’re liable for the tax violation of unpaid trust fund taxes, the agency will send you a letter about the plan of assessing the Trust Fund Recovery Penalty against you. If you’re offshore, you have a total of 75 days from the date of the letter to appeal the proposal, but you only have 65 days if you’re in the United States. Then, if the IRS won’t receive any response from you, the agency will send you a Notice and Demand for Payment letter and assess the Trust Fund Recovery Penalty against you. Besides that, if the IRS asserts the said penalty, they can also do the collection of taxes from your personal assets. 

How to Avoid Trust Fund Recovery Penalty

You can avoid the Trust Fund Recovery Penalty by following the tax laws in the country. You have to make sure that you regularly collect all appropriate taxes from your employee’s paychecks and put them in a trust. Besides that, you also have to ensure processing your federal tax deposit and payment on the said date or schedule. Hence, always remember that any intentional failure to collect the trust fund taxes, honestly account these funds for, or processing the tax deposits on time from the wages of your employees may trigger the Trust Fund Recovery Penalty. Surely, that’s something you want to avoid happening in the future. 

FAQs

Who is liable for the Trust Fund Recovery Penalty?

The person liable for the Trust Fund Recovery Penalty is the one in a particular company or corporation who has been proven guilty of keeping the income taxes and FICA or Federal Insurance Contributions Act from the employees’ paychecks. The IRS will then have a Trust Fund Recovery Penalty assessment against a person who intentionally fails to pay trust fund taxes and pay them on time and is responsible for paying and collecting employment and income taxes of the employees or for the excise taxes getting settled in the agency. The responsible party is the one who has the responsibility and duty to collect, account, and pay the trust fund taxes of the company or corporation in the IRS. 

What are unpaid trust fund taxes?

Employers will collect the income taxes and FICA or Federal Insurance Contributions Act from the employees’ paychecks and put them in a trust. Then, during the tax season, they will process and pay these trust fund taxes in the IRS. However, if the employers don’t process these tax liabilities, these will then become unpaid trust fund taxes, resulting in a Trust Fund Recovery Penalty against the person responsible for committing the said violation. 

What is an IRS Trust Fund?

Employers in companies or corporations in the US are collecting FICA and income taxes from the paychecks of the employees. They will keep these funds in a trust until they process the tax returns or make a federal tax deposit during the tax season. These taxes are called the IRS trust fund that employers need to process on time to avoid facing the Trust Fund Recovery Penalty. 

How long does the IRS have to collect the Trust Fund Recovery Penalty?

The IRS has up to ten years to collect the Trust Fund Recovery Penalty from someone who has been proven to willfully withholding the trust fund taxes from the employees’ paychecks. However, the agency can only assess the penalty for only three years and it starts on the 15th of April after one year when the trust fund taxes need to be processed. Hence, if the IRS won’t do the Trust Fund Recovery Penalty assessment on the 14th of April the following year of the required date of filing, it now becomes illegal for them to do investigation, interview, and even conduct any TFRP assessment.

What if the company does not have the money to pay taxes?

If the employers of the companies or corporations don’t have the money to pay the withholding taxes in full at the moment, they have a few options to take advantage of. They can apply for a particular payment plan or any installment agreement available for them. In fact, as long as they meet the requirements, they can also process a payment less than the amount they ought to pay through a partial payment installment agreement or the Offer in Compromise program. Hence, they need to contact the IRS as soon as possible to check the options available for them. But mor

Which of the following does the IRS utilize as an interview tool when determining whom to hold responsible for trust fund taxes?

The IRS uses Form 4180 to determine who is responsible for unpaid taxes of the withholding trust fund in a company or corporation. It’s a form for Personal Liability for Excise Taxes or the Report of Interview with Individual Relative to Trust Fund Recovery Penalty. Besides that, this particular form contains direct questions that the responsible person needs to provide truthful and factual answers. The form will elicit responses that will show if the individual is responsible for the said violation. Then, once done with the interview, the revenue officer will require you to sign Form 4180. 

What is a Trust Fund Recovery Penalty waiver request?

It’s a Form 2750, which is a Waiver Extending Statutory Period for Assessment of TFRP. Signing this form provides people with benefits who are now facing Trust Fund Recovery Penalty. It doesn’t mean that you admit responsibility for what happened, but it helps extend the statutory period for Trust Fund Recovery Penalty assessment to give the IRS more time to audit your return.  

Conclusion

When you own and run a business with one or more employees, you have to keep in mind to pay trust fund taxes to the IRS on time. Unfortunately, many employers across the country have different issues with managing employment taxes. That’s why if you’re one of them, you’ll surely be at high risk to face the Trust Fund Recovery Penalty. It can involve a very large amount of money. Employment taxes and TFRPs are still a high priority enforcement area for the IRS and may trigger an audit. Therefore, you have to begin taking the necessary actions as soon as possible. Besides that, you may also have to hire an expert and experienced lawyer to give you the help and assistance you need. Always remember to exhaust all of your available options and make use of everything to your advantage. 

Keep Learning & stay ahead of the curve
Subscribe to our newsletter for updates that will save you tax

Related topics