What Is The Trust Fund?If your business has accrued a payroll tax debt, the IRS may be looking to assess a portion of the tax liability to you personally. The Service has the ability to hold the Responsible Individual(s) of a delinquent business accountable for payment of the Trust Fund Recovery Penalty (TFRP). The TFRP is the employee's withholding and FICA contribution. The TFRP does not include the employers matching FICA portion, unemployment, penalties and interest, which are strictly the employer's responsibility and not collectable from the Responsible Individual(s). Once the TFRP has been assessed to you, a resolution must be secured. We suggest reaching out to our parent company, M&M Tax Relief here or here, to discuss your options.
Is the TFRP An Addition To My Business Payroll Tax Debt?No, not really. The TFRP is not truly a penalty, since it is not added to your tax. It is the tax itself that has been assessed to an individual to be collected. Simply put, the IRS may collect the same tax from 2 or more different sources, the business and the Responsible Individual(s). If the delinquent business makes a payment toward the TFRP, the amount assessed to the Responsible Individual(s) will be reduced by that same amount, and vice versa. For example:
My brother David and I own a business with a payroll tax debt of $100,000 and we personally paid the TFRP of $80,000, our business tax debt is now down to $20,000. The remaining balance of $20,000 is completely a business responsibility and must be resolved by the business with full payment or other IRS tax resolution options available.
Is The TFRP Different From The Civil Penalty?The TFRP is a Civil Penalty that may be assessed to a Responsible Individual(s) according to IRC Section 6672.
Can The IRS Collect The Payroll Tax From Me And My Business At The Same Time?Yes. The IRS may collect the TFRP from the Responsible Individual(s) of a business with a delinquent employment tax liability while it collects the same tax from the business. However in some cases, the IRS will place the personal TFRP liability in Currently Not Collectible status while the business pays the debt through a formal Installment Agreement.
How Will The IRS Collect The TFRP If More Than One Person Has Been Assessed?The IRS will collect as much of the tax from as many individuals as possible until it is paid in full. The Service will not split the Civil Penalty into equal shares according to the structure of your business. For example:
My brother David and I own a business equally, 50/50. The business accrued $100,000 in back payroll tax, and $80,000 of the tax debt is TFRP. Over the years I have saved $60,000 toward my retirement, while David has spent his money more freely, saving just $20,000. The IRS will ask each of us to liquidate our savings and apply it toward the $80,000 TFRP. Now even though my business agreement with David says that I am only responsible for half of the TFRP, the IRS will not recognize our business agreement and collect the majority of the tax from me. It will be up to David and me to settle the dispute over the $20,000 that I believe that he owes me, without the involvement of the IRS.
In other words, the IRS doesn't care which Responsible Individual pays the TFRP, as long as it gets paid.
How Can I Settle My TFRP Tax Debt?If you have a Trust Fund tax liability, you will be afforded the some of the same resolution options as those delinquent taxpayers who owe 1040 income tax debts. The most common IRS back tax resolutions are the Installment Agreement and the Offer in Compromise. More options may be Currently Not Collectible status, Penalty Abatement, and others.
Who Is A Responsible Individual?According to IRC Section 6672, a Responsible Individual is "any person required to collect, truthfully account for, and pay over any tax" and "willfully" fails to do so, or "willfully attempts in any manner to evade or defeat any such tax or the payment thereof" may be liable for a "penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over."
In other words, a person must be "willful" and "responsible" for the collection and payment of the tax on behalf of the business and its employees. The person(s) held responsible will be determined by the facts and circumstances of each case and is initially decided by IRS Collections.
Please note, a person can be responsible but not willful, or vice versa and therefore not be held responsible for the TFRP.
What If I'm Not a Responsible Individual, But the IRS Is Attempting To Assess the TFRP Against Me?You can protest the IRS' proposed assessment of the Trust Fund against you. Before the IRS assesses the TFRP against any individual, it must send Letter 1153, a proposed assessment letter to each individual it plans to assess the liability. IRS Letter 1153 generally allows the recipient sixty days from the date on the letter to protest the assessment of the liability. The body of the letter explains how to submit a protest. So if you have received IRS Letter 1153 and don't agree with the proposed Trust Fund assessment against you, prepare and send your protest as soon as possible.
Will The IRS Take My Income Tax Refund?If you have been assessed the TFRP and have a Civil Penalty tax liability, the IRS will take your personal income tax refund and apply it toward the Trust Fund debt. This is part of the IRS' refund offset program. If you owe any back tax to the IRS, your refund will likely be taken and applied toward your balance until it is paid in full. This is true even if you have set up a formal Installment Agreement, or are in Currently Not Collectible Status.
You may want to adjust your withholding and 1040ES payments to reduce the size of your yearly refund while you owe back taxes. But be careful not to over adjust resulting in another tax debt. That's a sure way to make matters worse.