Trust Fund Recovery Penalty

Key Takeaways:

• Trust Fund Recovery Penalty (TFRP) – assessed when a business fails to deposit payroll taxes withheld from employees’ paychecks.
• Amount – the TFRP is equal to the amount of unpaid employment taxes.
• Liability – levied against the individual or individuals found responsible for the error, not the business itself.
• Form 4180 interviews – IRS agents hold interviews to identify responsible parties. 
• Appeals – You can appeal the assessment if you don’t agree with the penalty assessment.

What is the Trust Fund Recovery Penalty?

Businesses are required to withhold payroll taxes from employees’ paychecks, and they must send the payments to the IRS. The withheld taxes include FICA taxes: Social Security, Medicare, and a portion of income tax. 

If you don’t remit these taxes to the IRS, you’ll have to deal with consequences, like the TFRP. It’s called the Trust Fund Recovery Penalty because technically withheld taxes are held in trust until they’re deposited to the IRS.

However, the IRS doesn’t send notice of the TFRP to the business in general. It’s sent to the individual or individuals who are assumed to be responsible for failing to remit payment. This penalty is a big one, equal to the full amount owed in employment taxes. So, if the business owes $5,000, the penalty is $5,000. 

The business is responsible for the payroll taxes, but the TFRP is assessed on individuals. For sole proprietorships and unincorporated partnerships, the owner may end up being responsible for both the payroll taxes and the penalty. With corporations, the corp maintains legal liability for the payroll tax, while the penalty may be assessed against a variety of individuals.

In all cases, if the penalties and taxes go unpaid, legal issues could arise as the IRS continues its collection efforts.

Who Is Responsible for the TFRP?

So, how does the IRS figure out who’s responsible for the TFRP? When the IRS learns of the missed tax payment, it will start investigating who is responsible for making these payments within the business. Interviews will be set up to figure out who’s in charge of that process. 

The IRS calls these meetings Form 4180 interviews, which could entail questions about what the individual’s role is in payroll, taxes, and financial management within the company. The IRS is trying to figure out which person withholds taxes and who is supposed to ensure these payments get remitted to the government on time. 

Another important area is awareness — who knew or knows about the missed payment? The TFRP could be assessed against anyone who willfully fails to fulfill the business’s obligations.

Here are a few examples from the IRS of who may be found responsible:

• An employee or business officer
• A partnership member or employee
• A shareholder
• A corporate director
• A member of the board of a nonprofit
• Someone who manages and controls funds
• A professional employer organization (PEO)
• A third-party payroll provider or accountant

Generally, the responsible party must make a decision to not pay the tax. If they simply write checks at the behest of the owner, they are likely not to be responsible. 

How the Form 4180 Interviews Work

During the Form 4180 interviews, the IRS will try to establish responsibility “based on whether an individual exercised independent judgment with respect to the financial affairs of the business.” 

Form 4180 is the Report of Interview with Individual Relative to Trust Fund Recovery Penalty. The IRS agent who conducts the interviews relies on this form to ask you questions and gather facts. The goal of 4180 interviews is to establish responsibility, willfulness, and awareness related to unpaid employment taxes. Whoever is found responsible will receive the TFRP notice, Letter 1153.

TFRP IRS Notices: Form 2751 and Letter 1153

If you’re found responsible for missed employment tax payments, the first IRS notice you’ll receive is Letter 1153, Proposed Trust Fund Recovery Penalty Assessment. In this document, the IRS provides details about the payment you missed and the penalty amount. Read this letter thoroughly so you know the violation and how to move forward.

Here’s what to do next:

• If you agree with the assessment: Complete and sign Form 2751, Consent to Assessment and Collection. This signals that you will pay the amount assessed as a TFRP. Carefully read information about payment deadlines on the letter so you pay on time and don’t have to deal with additional penalties.
• If you disagree with the assessment: If you believe the assessment is wrong or the IRS determined the wrong liability for the missed payments, you have 60 days to file an appeal from the date on Letter 1153.

If you do nothing and don’t respond to Letter 1153, the IRS may take additional collection actions, including adding penalties, filing a federal tax lien, issuing tax levies (asset seizure), or pursuing legal charges. Whatever your response will be, make sure you act quickly. Talk to a tax expert when you aren’t sure how to deal with the TFRP, or if you want help fighting against an assessment of TFRP.

What If You Can’t Pay the TFRP?

If you don’t agree with the assessment and want to appeal, that’s one thing. But what if you know that it’s correct but can’t afford to pay?

Your next step will be applying for tax relief so you don’t risk additional penalties and problems for the business. You may consider these options:

• Payment plan: Payment plans allow you to pay monthly to get the balance paid off over time. Payment plans come in different forms, some of which may be applied for online, but others can be more complicated.
• Offer in compromise: If your financial situation doesn’t allow you to pay the full amount you owe, even with a payment plan, you can request an offer in compromise and provide financial details to the IRS to show that a lower offer is all you can afford to pay. 
• Currently not collectible (CNC): CNC status is a temporary pause on tax collections that the IRS agrees to when you’re experiencing financial hardship. Contact the IRS using the contact information on your notice to talk to an agent about this status and your financial issues.
• Penalty abatement: The IRS generally does not offer penalty abatement for the TRFP. Instead, you may need to pay the tax and then request a refund. 

Whatever you decide to do after getting the TFRP, make sure you act fast. Never ignore IRS notices, as doing so will only make the situation more serious.

How to Avoid the TFRP

The good news is that you can put better business financial management and payroll practices in place to avoid the TFRP and any issues with the IRS. Here are a few tips:

Ensure Year-Round Tax Efficiency

Withholding and paying payroll taxes is an ongoing responsibility; not just something to think about periodically. If you’re missing deadlines, you may need a better system for issuing paychecks, calculating tax withholding amounts, storing withholdings, and depositing them to the IRS. You may need some kind of calendar and alert system to remind you and the team of upcoming deadlines. 

Check for Accuracy

Any time you’re dealing with payroll, taxes, and deposits, make sure everything is accurate before submitting. You could get hit with penalties and other consequences if you don’t report properly or don’t pay the actual amounts owed.

Identify Responsible Parties

Certain employees should be in charge of employment tax responsibilities, which can help the business uncover kinks in the process and what went wrong when payments weren’t deposited properly. This can also help when the IRS is trying to figure out who has responsibility and awareness of any issues.

Schedule Internal Reviews

Even if everything seems to be running smoothly, schedule regular internal audits of your tax processes. This will help you catch mistakes before the IRS does and continue to make sure that employment taxes are being withheld and remitted properly.

Talk to a Business Tax Professional

Even when you’re running a business, you’re probably not a tax expert. That’s why it’s best to talk about your issue with a professional like a tax attorney, who understands tax laws and can help you deal with the TFRP process or appeal process. Working with an expert can help you avoid further penalties, interest, and other tax issues.

Benefits of Working with McLaud Law

Navigating tax penalties is never fun for a business, especially when you don’t fully understand the trust fund recovery penalty and the interviewing process for determining responsibility. This can be a complex legal process, but it will impact both you and your business in the long run. 

Work with the team at McLaud Law P.C. when you need representation or assistance with TFRPs, including negotiating with the IRS, paying off your tax bill, or filing an appeal to an assessment. Our team is experienced in these areas and is ready to help you get your business back on track. 

Contact McLaud Law today to schedule a consultation.

FAQs About the Trust Fund Recovery Penalty

Why Did I Get a TFRP Assessment?

The TFRP is assessed when a business hasn’t deposited employment taxes properly, and it is assessed against the individual responsible for making the payments. Even if the taxes were withheld from paychecks, they may not have been deposited.

How Much Is the Trust Fund Penalty?

The TFRP is equal to the amount of employment taxes that have not been paid, so the penalty matches the tax bill. The TFRP is only based on withheld FICA and income taxes. It isn’t based on the employer’s matching portion of FICA taxes.

Who Can Be Held Responsible for the TFRP?

The individual liable for the TFRP is whoever is in control of employment tax processes and payments, including an employee or officer, board member, shareholder, or director. The IRS will investigate who was responsible and who was aware that the taxes weren’t remitted.

What Is the Form 4180 Interview?

IRS agents that conduct TFRP interviews use Form 4180 to ask questions and figure out what employees or officials are in control of tax and financial processes. They will use this form and the interview to determine liability for the TFRP.

Why Did I Receive Letter 1153?

Letter 1153 is sent to an individual who is found responsible for not paying employment taxes when they’re due. To respond to this letter, you can either complete the agreement form and pay the amount due or appeal the assessment within 60 days.

This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.