Payroll Taxes and the Trust Fund Recovery Penalty (TFRP)

What to do When Your Business Falls Behind on its Federal Tax Deposits

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The IRS considers back payroll tax debt as the most serious of all tax debts. The IRS views operating a business while owing back payroll taxes as illegally borrowing money from the government. The IRS can seize assets and force you out of business if you owe back payroll taxes.

The scary thing about payroll taxes is that the IRS can assess a portion of the tax, called the Trust Fund Recovery Penalty, on individuals it believes had authority to collect and pay the tax. This can be an owner manager and even a bookkeeper.

The number one reason I have business clients is because of unpaid payroll taxes. Each scenario basically works similar to this:

Business is slow. You pay the rent and your employees’ wages, but don’t make your federal tax deposits. You believe that things will turn around next month with more work. The busy season is right around the corner and you are sure that you’ll be able to pull out of this slump catch up on your back payroll taxes.

Several months go by. Your sales have gone down. Orders stopped coming in and holiday sales were awful. Your vendors have sued you and your landlord is threatening to evict you. You haven’t been filing your 941 returns or made any federal tax deposits for the last several quarters. You decide to shut down and sell your assets to pay off the creditors you have personally guaranteed.

You feel that you are ready for a fresh start with everyone paid off. But wait. The IRS sends you a notice saying that they intend to hit you personally with a 100% penalty for non-payment of payroll taxes, also know as the dreaded “Trust Fund Recovery Penalty”.

When payroll deposits haven’t been made, the IRS can review a company’s books, interview employees and then hold its owners, managers, bookkeepers and check-signers personally responsible for the unpaid payroll taxes. This penalty applies mostly towards corporations. If you were a sole proprietorship, LLC or partnership, you can be found directly responsible for payroll taxes without the TFRP provision.

How the IRS Determines Who is Responsible for the Trust Fund Recovery Penalty

Per Section 6672 of the Internal Revenue Manual:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable for a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

The IRS makes over 50,000 TFRP assessments each year, averaging $21,000 per responsible person.

For each defunct business owing payroll taxes the IRS on average finds 1.6 responsible persons but it is not uncommon for several people to be declared responsible. The IRS can still assess the trust fund penalty if the business is still open. Then they have not only the individuals to collect from but also the business.

Revenue Officers will conduct what they call the Trust Fund Recovery Penalty Interview and begin by putting together a list of people with any authority over the businesses finances.

 Who made the financial decisions in the business?

 Who signed or had authorization to sign on the checking account?

 Who had the power to pay or direct payment of bills?

 Who had the duty of tax reporting?

To get this information the officer may interview everyone whose name comes up when she asks the above four questions. She looks at bank and corporate records for the names on bank signature cards, and to find out who actually signed checks and who were corporate officers.

The Trust Fund portion of payroll taxes is not a dischargeable tax debt in bankruptcy, however they can be resolved through an Offer in Compromise, payment plan, or placed into a not currently collectable status.

Appealing the Trust Fund Recovery Penalty

Once you are found to be a responsible person by a revenue officer, you will be sent a notice and a tax bill. The revenue officers decision can be protested to the appeals division.

From the date of the initial notice you have 60 days to file an appeal. To do this you must prepare a written response protesting the decision to the Appeals Office. If you fail to use your appeal rights, 60 days from the initial notice (notice number 1153), the assessment becomes final. If you refuse to pay the IRS can go through its normal collection process for a tax debt, i.e. file a lien, and then levy.

Even by simply filing the appeal of the proposed TFRP assessment it will buy you time- even if you know you are clearly responsible. An IRS collector can’t take enforced collection action. Another advantage for filing an appeal is that interest does not run during the time an appeal is being considered, which could give you time to catch up on the payment. For example, if you are eventually found responsible for $50,000 in unpaid payroll taxes and your appeal process takes a year, you’ll avoid paying approximately $3,500 in interest.

If you lose your appeal and feel you truly are not responsible go to court. You can sue in tax court, in the U.S. District Court nearest you or in the U.S. Court of Claims. Tax court doesn’t require you to pay the IRS any tax before filing our suit. However, if you sue in a district court or the court of claims, you must first pay at least some of the taxes claimed before you file a lawsuit seeking a refund. The minimum you must pay is equal to the unpaid payroll taxes due for one employee for one quarter of any pay period.

I have laid out the process in plain English, but the truth of dealing with the IRS is that it may not be this simple.

Hire an Experienced Licensed Representative.  Call Nick @ 720-340-4065 or email:
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