THE TRUST FUND RECOVERY PENALTY, ALSO CALLED THE 6672 PENALTY
Three ways to beat this trust fund recovery penalty:
- file a timely appeal
- file an 843 Claim after the tax is assessed
- file on offer in compromise, doubt as to liability
Most individuals are very surprised to learn that the IRS has the right to collect the trust fund recovery penalty (TFRP) against individuals of corporations who failed to pay their payroll taxes.
The penalties are set up 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 so-called trust fund taxes.
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.
FOR WILFULNESS TO EXIST, THE RESPONSIBLE PERSON:
- Must have been, or should have been, aware of the outstanding taxes; and
- Either intentionally disregarded the law or was plainly indifferent to its requirements (no fraudulent intent or bad motive is required.)
- Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of wilfulness.
CHECK LIST OF WHETHER YOU CAN BE HELD RESPONSIBLE.
THIS IS THE LISTED CRITERIA THAT THE INTERNAL REVENUE SERVICES USES: DID YOU….
- determine financial policy for the business
- direct or authorize payments of bills to creditors
- open or close bank accounts
- guarantee or co-sign loans
- sign or counter-sign checks
- authorize payroll
- authorize or make Federal Tax Deposits
- prepare, review, sign, transmit payroll tax returns
- right to hire/fire
- this is not a full list but is a great starting point
THE IRS WORKS THIS CASE BY THE FOLLOWING METHOD:
You may be asked to complete an interview, form 4180 in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee’s function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. The IRS will secure statements from many persons before it determines who the responsible parties are. The IRS will pull the corporate resolutions, bank signature cards and canceled checks of the said corporation to determine who the responsible persons are.
HOW DOES THE IRS FIGURE OUT WHAT THE PENALTY DOLLAR AMOUNT WILL BE? HERE IS THE FORMULA:
The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:
- The unpaid income taxes withheld; plus
- The employee’s portion of the withheld FICA taxes;
- Any timely payments will be subtracted from the amounts owed;
- Any taxes designated to “trust fund only” will be subtracted from the total owed.
These are just a few of the existing criteria that the IRS agent will use to see if you are responsible for the trust fund tax and it’s penalty.