Common Questions answered about the IRS Trust Fund Recovery Penalty
The IRS Trust Fund Recovery Penalty has nothing to do with a trust funds for opulent lifestyles. No, unfortunately, it is a tax assessed against those who said they were going to send money to the IRS on behalf of others but never did. In this article, we will answer some of the most common questions we are asked about the IRS Trust Fund Recovery Penalty.
What is the IRS Trust Fund Recovery Penalty?
When someone collects taxes on behalf of the IRS, but then doesn’t send those taxes to the IRS, Congress has authorized, through Internal Revenue Code Sec. 7501, Revenue Officers to go out and assess and collect those unpaid taxes against those who did not collect and forward those taxes to the IRS. Because the Trust Fund Recovery Penalty is equal to 100% of the unpaid taxes held in trust, it is sometimes referred to as the “100% Penalty.” Because the penalty is civil and not criminal, it is sometimes called the Civil Penalty (or “CIV PEN” as referred to on the IRS Account Transcripts). And because it is imposed by section 6672 of the Internal Revenue Code, it is sometimes called the “6672 Penalty.”
Who typically gets assessed with a Trust Fund Recovery Penalty?
Typically, it is employers who do not forward the taxes withheld on behalf of employees. Here’s an example. Suppose John has one employee, Mark. John is waiting to get money from a big customer. He owes Mark $1000 in gross pay for the week. But all he has is $800, enough for Mark’s net pay. So Mark cashes his check for all of his net pay, and John does not send the $200 to the IRS. In this case, the IRS would assess the trust fund recovery penalty against john in the amount of $200.00. John would become personally liable for this. You can look at form 941 (or 943 for farm employees) to see what this amount withheld was supposed to be.
Isn’t failure to pay over employment taxes technically embezzlement?
Perhaps. In most cases we see though, there is no actual possession of the unpaid trust fund liabilities. If that were the case, the IRS could press criminal charges. this is highly unusual to happen, however. In our home state of Connecticut, someone is far, far more likely to be arrested by the state for not paying state taxes than by the federal government for not making payroll deposits.
Can it be assessed against owners only?
No, the Trust Fund Recovery Penalty can be assessed against any one the IRS thinks had a hand in the non-payment. We have seen them try to impose it when the people had knowledge but no actual control. And both things are required. In order to be liable to fr the Trust Fund Recovery Penalty, a person must have had a duty to collect and pay over the taxes, and willfully refused to do so. That’s what the law says, but in practice, IRS Revenue officers would rather be overaggressive in imposing the penalty than risk someone getting away. The IRS follows the interview process in Form 4180 to assess the penalty.
What if I am dead broke, why would the IRS assess a penalty against me if there is no way I can pay it?
The IRS is not supposed to. If you have limited resources, the IRS should look into that before assessing the trust fund penalty. However, we have seen time and time again that this requirement is routinely overlooked.This is why it is essential to have someone who knows how to fill out a collection information statement Form 433-a working on your behalf.
Can the IRS impose the Trust Fund Recovery Penalty against more than one person?
Yes. As many as possible. The debt will remain owing against everyone until it is paid of by one or more than one person.
Can the IRS collect more than what is owed by going after everyone separately?
No. The IRS only gets to collect this money once.
Can I appeal a Revenue Officer imposing the Trust Fund Recovery Penalty against me?
Yes. Once the Trust Fund Recovery Penalty is imposed against you, you will be given the right to appeal to IRS office of appeals. As long as you present your case and show up, if you lose, you can still take your case to tax court.
What if I never appealed the decision. Can I undo an imposition of a trust fund recovery penalty?
Yes, but it is harder. The process by which this is done is a claim for refund. however, it is more difficult to undo something the IRS has done than stop them from doing it in the first place. It must be proven the reason why you did not raise this issue the first time. Oftentimes, we find that the taxpayer had a conflict of interest with a CPA or even attorney who represented two parties with a conflict. For instance, the owner who was responsible and the bookkeeper or controller who knew about it, but couldn’t do anything to stop it. Or sometimes their is collusion against partners to pin the blame on a n unpopular partner.
Can I file an Offer in Compromise to settle this a Trust Fund Recovery Penalty?
Yes. The personal tax liability that the Trust Fund Recovery Penalty is can be negotiated like every other tax debt. With an installment agreement, a partial payment installment agreement, currency non-collectible status or an Offer in Compromise. One thing that can’t done is unlike personal taxes, Chapter 7 Bankruptcy can not discharge the Trust Fund Recovery Penalty.
Is there a time limit the IRS has to collect on the Trust Fund Recovery Penalty?
Yes, just like personal income taxes, there is what is known as a Collection Statute Expiration Date (CSEDs) which is the last date the IRS can collect on a tax debt. Read more about the CSEDs and how they work here.
The business is already paying back all unpaid payroll taxes. Why is the IRS trying to stick me the with Trust Fund Recovery Penalty?
We see this all the time, when we have negotiated an acceptable repayment plan for all payroll taxes to be repaid, the IRS will still come after individuals to asses the Trust Fund Recovery Penalty. The reason is because (1) they IRS only has a limited amount of time to assess the Trust Fund Recovery and (2) what happens if the business does not pay it back? So a Revenue Officer is forced to be over aggressive, and impose the Trust Fund Recovery in cases where there is not much need.