What is the Trust Fund Recovery Penalty (TFRP)?
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 TFRP. These taxes are called trust fund taxes because the employer holds the employee’s money in trust until making a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes are not immediately deposited by the business.
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 who willfully fails to collect or pay them. It is very important for employers to accurately report and pay employment taxes.
What are employer trust fund taxes?
Generally, the federal income tax, Social Security tax, Medicare tax amounts withheld by an employer from his employees’ paychecks are considered trust fund taxes. The employer holds those amounts in trust and should be remitted to the Treasury. Each employee receives full credit for these trust fund taxes withheld from your paycheck even if the employer fails to pay them over to the Treasury. The employer’s matching portion of the Social Security and Medicare taxes are not considered trust fund taxes. Social Security tax is evenly split at 6.2 percent for both the employer and the employee for the 2008 tax year example in the presentation. Medicare tax for both the employee and the employer are evenly split at 1.45 percent.
Internal Revenue Code Section 6672
Internal Revenue Code Section 6672 provides the legal basis. It states that the person must be responsible for collecting truthfully, accounting for, and paying over the tax that is withheld, and must have willfully failed to do so.In short, it is generally the individual or individuals responsible for the financial management of the business. Per Internal Revenue Code Section 6672, willfulness means that the responsible individual or individuals voluntarily, consciously, and intentionally fail to pay over the taxes. It is important to note that bad motive or intent is not necessary. Willfulness can be presumed if net payrolls were paid and the actual knowledge of the unpaid trust fund is not necessary.
Trust Fund Penalty Recovery Process
A trust fund recovery penalty dispute may be resolved through the mediation process. Fast Track Mediation is a nationwide program in which a trained Appeals mediator is assigned to help facilitate an agreement between the taxpayer and Collection while the case is still with Collection division. It is designed to conclude within 30 to 40 days after the parties agree to mediate. If no agreement is reached, the taxpayer still retains full appeals rights. Revenue Procedure 2003-41 contains the Fast Track Mediation procedures.
Who does the Trust Fund Penalty Apply to?
The trust fund recovery penalty applies when a person who is responsible to collect, account for and pay over the taxes withheld willfully and fails to pay over the trust fund. Responsibility is a matter of status, duty and authority and being responsible means the person had significant control over the corporation’s financial decisions.
Types of Recovery Processes
The rules governing disclosures are contained in IRM 11.3.40, and the appeals officer may consult with a disclosure officer to determine what could be shared with whom. The appeals officer would carefully avoid improper disclosure of any other taxpayer’s personal information, but will work with you to provide sufficient information about the issues in the case to enable you to resolve the case.
Fast Track Mediation – A nationwide program in which a trained Appeals mediator is assigned to help facilitate an agreement between the taxpayer and Collection while the case is still with the Collection division.
Post-Appeals Mediation –Post-Appeals Mediation is currently available through a pilot program in Atlanta, Chicago, Cincinnati, Houston, Indianapolis, Louisville, Phoenix and San Francisco. Post-Appeals Mediation takes place after settlement negotiations with Appeals are complete but unsuccessful.