A Brief Overview of IRS Trust Fund Penalties

Even if you’ve dealt with collection agencies in the past, the experience won’t prepare you for the IRS. If you’re delinquent in paying your federal business taxes, it can levy your company assets, bank accounts, accounts receivable, and even your personal property.

Many business owners shield themselves from personal liability for company debts by forming a corporation or LLC. While this strategy can prevent regular creditors from seizing your personal assets to pay business debts, the IRS can pierce the corporate veil and go after you for unpaid employment tax liabilities. This powerful collection tool is known as the Trust Fund Recovery Penalty (TFRP).

The Trust Fund Recovery Penalty Explained

Each company has a person or a number of people responsible for managing its tax responsibilities, such as payroll withholding and remitting tax payments to the government. Should that person willfully (intentionally) fail to pay what the company owes, they can be held personally liable for the Trust Fund Recovery Penalty.

The federal income tax withheld from employees’ paychecks and the employee share of Medicare and Social Security taxes are regarded as trust fund taxes because you are holding the funds in a trust until you remit them to the IRS. You could be held personally liable for this portion of the employment taxes. The IRS can assess a penalty in an amount equal to these trust fund taxes if the company can’t pay its employment tax obligations on time.  Even if you shut the business down, the government can still assess this penalty to you personally.

In general, the TFRP may be assessed against anyone who:

  • Is responsible for withholding or paying employment and income taxes, and
  • Deliberately and willfully fails to collect or pay them.

Examples of a responsible person might include:

  • An employee or member of a partnership
  • An employee, officer, director, or shareholder of a corporation
  • A member of a nonprofit board of trustees
  • Payroll service providers
  • Bookkeepers

The IRS Investigation Process

Before issuing a penalty, the IRS often carries out an investigation to determine who in your company is responsible for its financial affairs. The IRS will interview those who potentially could be liable and is required to complete a Form 4180, Report of Interview With Individual Relative to Trust Fund Recovery Penalty.  If the IRS determines, based on this interview, that you are liable for the Trust Fund Recovery Penalty, you will receive a Letter 1153 with details. You have 60 days from the date of the letter to appeal the assessment. (If you live outside the US, the deadline is extended to 75 days.) If you don’t respond, the IRS will send you a Notice of Demand for Payment and then proceed with collection actions against your personal assets.

If you disagree with the assessment, you can send a protest letter specifying why the results of the investigation are erroneous. An IRS Appeals Officer will review the letter. If they agree with you, the original Letter 1153 will be rescinded. If they don’t, you have the option of taking the matter to a U.S. District Court.

Contact a Seattle Tax Attorney

No one should face an IRS investigation and possible Trust Fund Recovery Penalty alone. Attorney Bob Boeshaar is a former IRS trial attorney with years of experience in helping clients overcome tax disputes and controversies. He will deal with the IRS on your behalf and ensure that your rights are not jeopardized during the resolution process. For more information, call (206) 899-4860 or contact Boeshaar Law.

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