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To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the Trust Fund Recovery Penalty (TFRP). These taxes are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.Who Can Be Responsible for the TFRP? The TFRP may be assessed against any person who:
- is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
- willfully fails to collect or pay them.
- an officer or an employee of a corporation,
- a member or employee of a partnership,
- a corporate director or shareholder,
- a member of a board of trustees of a nonprofit organization,
- another person with authority and control over funds to direct their disbursement, or another corporation.
Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.
The IRS will request that any potential responsible parties complete an interview in order to determine the full scope of their duties and responsibilities. A Revenue Officer prepares form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business.
Assessing the Trust Fund Recovery Penalty If the IRS determines that you are a responsible person, they will provide you with a letter stating that they plan to assess the TFRP against you. You have 60 days (75 days if this letter is addressed to you outside the United States) from the date of this letter to appeal their proposal. If protest against the assessment is not made and appealed to the IRS, they will assess the TFRP.
Once the assessment is made, aggressive collection actions will follow. The IRS will take enforced collection action against your personal assets. They will file a federal tax lien or take levy or seizure action. This includes garnishing your wages or levying your bank account.
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