Who is Responsible for the Trust Fund Recovery Penalty?
When certain Trust Fund taxes are not paid, the IRS can issue a Trust Fund Recovery Penalty (TFRP). There can be responsible person assessments against any individual for failure to collect, account for and pay over tax or a willful attempt t evade or defeat tax or payment thereof. Responsible person assessments exist for the following taxes:
- Form 941, Employer's QUARTERLY Federal Tax Return
- Form 720, Quarterly Federal Excise Tax Return (see IRM 220.127.116.11.2, TFRP For Collected Excise Taxes)
- Form CT-1, Employer's Annual Railroad Retirement and Unemployment Return
- Form 943, Employer's Annual Federal Tax Return for Agricultural Employees
- Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
- Form 945, Annual Return of Withheld Federal Income Tax
- Form 944, Employer's ANNUAL Federal Tax Return
- Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests
- Form 8804, Annual Return for Partnership Withholding Tax (Section 1446)
The TFRP penalty was provided for by IRC § 6672. The IRS must investigate any TFRP case and assign a revenue officer who must establish responsibility and willfulness when determining whether to proceed with assertion of the TFRP.
According to IRS guidelines, responsibility is a matter of status, duty, and authority. A determination of responsibility is dependent on the facts and circumstances of each case.
Generally, the IRS will examine this list of people to determine responsibility.
- Officer or employee of a corporation
- Partner or employee of a partnership
- Corporate director or shareholder
- Another corporation
- Employee of a sole proprietorship
- Limited liability company (LLC) member, manager or employee
- Surety lender
- Other person or entity outside the delinquent business organization
- Payroll Service Provider (PSP)
- Responsible parties within a PSP
- Professional Employer Organization (PEO)
- Responsible parties within a PEO
- Responsible parties within the common law employer (client of PSP/PEO)
Business entities (including corporations, S corporations, LLC, etc.) that are determined to be the collection agency in the case of certain collected excise taxes
To determine whether a person has the status, duty and authority to ensure that the trust fund taxes are paid, consider the duties of the officers as set forth in the corporate by-laws as well as the ability of the individual(s) to sign checks. In addition, determine the identity of the individuals who:
- Are officers, directors, or shareholders of the corporation
- Hire and fire employees
- Exercise authority to determine which creditors to pay
- Sign and file the excise tax or employment tax returns, such as Form 941, Employer’s Quarterly Federal Tax Return
- Control payroll/disbursements
- Control the corporation’s voting stock
- Make federal tax deposits
The full scope of authority and responsibility is contingent upon whether the person had the ability to exercise independent judgment with respect to the financial affairs of the business.
If a person is an officer or owns stock in the corporation, this cannot be the sole basis for a responsibility determination.
If a person has the authority to sign checks, the exercise of that authority does not, in and of itself, establish responsibility.
IRS guidelines indicate that an individual with signatory authority only can be merely a convenience. Individuals performing ministerial (Ministerial acts are performed under the supervision of someone else and do not require independent judgment or decision-making ability) acts without exercising independent judgment will not be deemed responsible. In general, non-owner employees who act solely under the dominion and control of others, and who are not in a position to make independent decisions on behalf of the business entity, will not be assessed the TFRP. Non-owner employees are those who do not own any stock, interest, or other entrepreneurial stake in the company that employs them.
The IRS gives the example of a bookkeeper of a company, which is not an owner and is not related to an owner. She has check signing authority and pays all of the bills the treasurer gives her. She is not permitted to pay any other bills, and when there are not sufficient funds in the bank account to pay all of the bills, she must ask the treasurer which bills to pay. The bookkeeper is performing a ministerial act and should generally not be held responsible for the TFRP.
According to the IRS, A person is "responsible" for purposes of the TFRP if that person has "significant control" over the company's finances. "Significant control" means more than having the mere mechanical duty of signing checks or preparing tax returns or having a title that appears to have authority. However, a responsible person need not have the final word in the company regarding the payment of creditors. Officers and higher level employees of a company who are non-owners may still be required to sacrifice their jobs (i.e., quit) to avoid being responsible for the TFRP, rather than obey the orders of an owner to pay other creditors but not to pay current federal trust fund taxes as they become due. See Brounstein v. United States, 979 F.2d 952, 956 (3rd Cir. 1992).
A person is liable for the TFRP if the two statutory requirements below are met:
- The person against whom the penalty is assessed must be "responsible"
- The responsible person must have "willfully" failed to collect or pay over trust fund taxes to the government
Willful means intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental. No evil intent or bad motive is required. To show willfulness, the government generally must demonstrate that a responsible person was aware, or should have been aware, of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. A responsible person's failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the TFRP "willfulness" element.
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