The Trust Fund Recovery Penalty is a penalty that holds certain third parties liable for “trust fund” taxes that the employer failed to withhold and pay over the IRS. The trust fund recovery penalty is equal to the amount of the unpaid trust fund taxes, essentially doubling the tax bill.
Why Is The Penalty Assessed?
Under IRC §§ 3102, 3202, & 3404, employers must withhold certain “trust fund” taxes such as Medicare and Social Security contributions from employee paychecks and remit those funds to the Federal government. If the employer fails to remit the withheld trust fund taxes to the Federal government, the IRS is authorized by IRC § 6672(a) to hold responsible persons who willfully fail to collect, truthfully account for, or pay over those trust fund taxes severally liable for the entire unpaid trust fund tax liability, plus interest and penalties. Otherwise known as the 100% penalty, the Trust Fund Recoveyr Penalty (TFRP) effectively doubles the unpaid tax liability.
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 to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.
IRC § 6672(a)
Who Is A Responsible Person?
Only a responsible person can be held liable for the TFRP, but who qualifies as a responsible person? A responsible person is required to collect, truthfully account for, or pay over trust fund taxes. A person does not have to be an individual, they can also be an entity. More than one person can be a responsible person.
Responsibility for collecting, accounting, and remittance of trust fund taxes can be evidenced by a person’s control over a business’s finances. In determining whether one is responsible, courts evaluate whether the individual or entity:
(1) is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority.
Vinick v. United States (2000)
The IRS often concludes that one is a responsible person if they have “significant” control over the company’s finances.
Case Law Is Not Kind To Responsible Persons
- Failure of any of the three duties to collect, truthfully account for, or pay over trust fund taxes can result in TFRP liability. The 3 duties are read disjunctively so willful violation of any one can subject a responsible person to TFRP liability. Slodov v. United States (1978).
- The TFRP applies to all responsible persons. The least responsible person is just as liable as the most responsible person. Erwin v. United States (2010).
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