Trust fund tax is the money held back from the wages of an employer by an employer and held in trust until it is paid to the treasury. Examples of employer’s wages include social security, medical taxes, and income taxes. In other words, the wages earned by employees are usually not paid in full. That is why they are called trust fund taxes.

The Trust Fund Recovery Penalty (TFRP) is a penalty levied against those who have the duty of collecting and paying over trust fund taxes to the government and purposefully avoid or attempt to avoid payment.

While most penalties are pecuniary or involve jail time, the IRS characterizes this penalty as a collection action.

A revenue agent checks the business’s standard practices in financial affairs to determine which individuals are accountable for paying the taxes. These individuals are personally liable for their share of the unpaid taxes. This is the Trust Fund Recovery Penalty. A pecuniary penalty in the amount of 100 percent of the unpaid taxes is also part of the TFRP.

Who is Responsible for the Trust Fund Recovery Penalty?

The revenue agent is responsible for the TFRP. The agent must ascertain two things to prove that the Trust Fund Recovery Penalty is suitable for an individual. Firstly, the revenue agent must find that the individual was responsible for making the business’s tax payments. Secondly, he or she must find that the individual “willfully” neglected to do so.

According to the Internal Revenue Service, responsible parties are usually a company board member, company partner, or employee with the authority or duty to direct the company’s financial tasks.

The CPA Journal notes, “IRC section 6672 needs significant control over the business’ financial authority is circumscribed by, for instance, a senior officer who has the final say on which creditors will be paid, Trust Fund Recovery Penalty liability will not be applicable.”

The IRS takes a basic approach to finding out who’s liable for the TFRP. To determine who should be evaluated with the TFRP, they examine vendor contracts, cancelled checks and other documented facts. Generally, these specifically show which individuals are involved in the company’s financial transactions.

That doesn’t imply that any individual the IRS deems a responsible party is susceptible to the TFRP. In fact, identifying individuals who are financially accountable for the business is a part of the investigation. The IRS must also find that their actions were deliberate or negligent.

The IRS defines deliberate actions as done “voluntarily, consciously, and intentionally” to use the collected monies for other reasons. They further note, “You are acting on purpose if you pay other expenses of the business instead of withholding taxes.”

In other words, individuals aren’t usually liable for the TFRP if they didn’t know about the missed tax payments. An individual who’s not able to override another person’s financial authority in the business aren’t liable for the TFRP liability either.

Form 4180: Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes

If the IRS has you in their sights for the Trust Fund Recovery Penalty, then a revenue agent will request a face-to-face meeting. The agent does this in the hope that he’ll achieve a spoken or written interview. The IRS then uses your statements in the case against you during the process. So, be careful.

Responses to the written interview should be thorough and brief. Above all, keep away from revealing information that may lead the agent to thinking that you’re responsible for the unpaid employment taxes.

Later, after the interview form is signed, the agent will notify the parties that they’ve deemed responsible for the unpaid employment taxes. Therefore, you’ll receive a notice if you were found responsible in full or in part.  It’ll explain the appraisal and include a due date and payment instructions as well.

If you’re partly responsible for the penalty, the IRS will require just your part of the unpaid taxes and penalty. Likewise, if you’re fully responsible, your demand for payment includes all the unpaid taxes and the 100 percent penalty.

Individuals certainly have the legal right to file an appeal by giving a response to the notice within 60 days. The individual along with his or her representative may submit the appeal, including a written response and supporting documentation.

Who can assist me in my assessment for TFRP liability?

Every taxpayer has the right to have professional representation during the TFRP assessment interview. In fact, the written or in-person interview should be followed with extensive preparation by the individual and his or her tax adviser.

Three types of tax professionals have unlimited representation rights with the IRS. These are certified public accountants, enrolled agents, and tax attorneys.

Tax attorneys have an exceptional skill set that serve taxpayers best in a court of law. A tax attorney makes sense for a defendant in tax court against an accusation of fraud, for instance.

On the other hand, an enrolled agent focuses their obligations basically on tax matters. His or her view is one-dimensional. An enrolled agent is a right choice for representation during a TFRP assessment.

Finally, certified public accounts have indefinite representation rights with the IRS. Many taxpayers choose to hire accountants with a specialty in tax relief for representation during a TFRP assessment. This tax adviser works in most areas of finance with a focus in tax. Therefore, he or she has a well-rounded perspective with a unique opportunity to maximize the defense of your case.

Regardless of the kind of representative you hire, verify credentials and reputation. In other words, if the tax adviser is an accountant, make sure his certification is current with the Board of Accountancy. Be sure to check in with the IRS about your enrolled agent’s standing.

In addition, verify a quality reputation by looking at the tax professional’s Better Business Bureau profile. Also, be sure to confirm that there are no complaints with their governing entity.

A Final Trust Fund Recovery Recourse

Responsible parties can evade the liability of a company’s employment taxes by having a wide prospect of the business practices. This should include everyone’s job in disbursing money to creditors, as well. Cases with rich documented support have the best chance at a favorable outcome. These credentials can also include written testimony from third parties.

A professional tax adviser should present your case with certifiable facts and a complete understanding of the TFRP.

If you receive a notice saying the IRS is evaluating you with a Trust Fund Recovery price, hire professional help immediately. The tax professional’s experience and success rate should be put into consideration for the best possible outcome. Gather comprehensive documents that support your case. Be sure to include contact information for parties who may also be called upon to submit affidavits.