by Brian Mahany
A Trust Fund Recovery Penalty (“TFRP”) is not a penalty in the traditional sense. It a collection tool used by the IRS as an alternative method of collecting certain taxes from businesses. Under both state and federal law, business insiders and control persons may be held personally responsible for unpaid business taxes.
To understand the penalty and how it works, one first needs to understand what a trust tax is. These are taxes “collected” from a third person and held in trust for the government – think employment and sales taxes.
When you purchase a can of soda for $1.00, the shopkeeper typically charges you sales tax. Thus you might have to pay $1.06 for the soda. The six cents is collected from a third party (you) and held for the state. The same is true for withholding taxes. You may owe your employees $20 per hour but typically you “collect” and hold back a couple bucks of that money for taxes.
If the business doesn’t pay these taxes, the government can seek to collect the unpaid taxes through a trust fund recovery penalty which is sometimes called a “transfer assessment” or “100% penalty.”
Who is Liable?
Although each state’s laws may vary slightly, generally the IRS and state tax authorities can seek to hold responsible anyone who had authority to pay the taxes but failed to do so. Examples include:
· Officers and directors (especially those involved in finance)
The IRS’ authority to transfer the debt to responsible individuals is found in sec. 6672 of the Internal Revenue Code. Because the underlying debt is a trust fund, these penalties are generally not dischargeable in bankruptcy.
Failure to turnover trust fund taxes is a crime punishable by imprisonment. It can also make you personally responsible for the business’ tax debt.
The penalty is imposed when the business cannot or will not pay the outstanding taxes. The process begins with an investigation by an IRS revenue officer. He or she will determine who participated in the decision not to pay the tax. In certain cases, the IRS or state revenue agency may refer the case for criminal investigation or simply shut down the business.
If the IRS seeks to question you about who made the decision not to pay taxes, seek professional legal help immediately. Often the IRS simply looks at corporate records to determine who the officers or directors are. That could mean a field sales V.P. with no say or knowledge about the company’s finances could be assessed tens of thousands of dollars simply because his business card says “Vice President.”
Thousands of taxpayers each year receive improper transfer assessments imposing the trust fund recovery penalty. Why?
There are several reasons. First, most people wait too long before seeking legal representation. Second, the IRS often will assess the bookkeeper or person whose signature is on the check. Unfortunately, that person may simply be someone with no authority to decide who gets paid and who doesn’t.
Much depends on what you say in an interview with the revenue officer. A lot is riding on that single interview. Botch it and you may find yourself personally owing for someone else’s mistakes.
We have found it much easier to block the assessment of the penalty up front than it is to pursue appeals once the penalty is applied.
A tax lawyer can also help you when the IRS waits too long to assess the penalty. The government has 3 years from the date the original taxes were due to transfer the debt.
Not having the money is usually not a defense for trust fund taxes. While that argument might work for income tax debts, the government views trust funds as monies already collected from an employee (or customer if it is a state sales tax.) Believe it or not, not having the money is also not a defense to a criminal tax prosecution.
Our advice is simple. If the IRS is seeking to interview about unpaid business taxes or if you failed to pay over these taxes and are caught, call the tax lawyers at Mahany & Ertl immediately. We are fully prepared to represent you in both the investigation / interview stage and through the entire IRS appeals process if the debt has already been assessed to you.
For more information, see our website article on trust fund recovery or contact attorney Brian Mahany at (414) 704-6731 (direct) or by email at All calls are protected by the attorney client privilege and are kept in strict confidence. Our tax lawyers have helped many taxpayers with a wide variety of IRS audit defense and collection issues.
Mahany & Ertl – America’s Tax Lawyers. We proudly give taxpayers a voice. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. IRS services available worldwide.