Trust Fund Penalty

If Withholding Taxes, also commonly called “Trust Fund Taxes” or “941 Liabilities,” remain unpaid by a business entity, the IRS will aggressively pursue collection from responsible individuals involved in operating the business or who are otherwise involved in making business and financial decisions for the business. The IRS is authorized to “pierce the corporate veil” by assessing the unpaid Withholding Tax liabilities of a business directly against the individuals that are responsible for the company’s failure to properly withhold and pay the Trust Fund Taxes. This individual assessment is called the Trust Fund Recovery Penalty (TFRP).

In general, the IRS is authorized to assess the TFRP against individuals involved in the business who have control over the use and disposition of a company’s assets, or otherwise have decision making authority in connection with the payment of the company’s liabilities, and who also “willfully” fail to pay the company’s Trust Fund Taxes. The right of the IRS to assess the Trust Fund Recovery Penalty is a legal issue dependent on applicable law and the individual facts and circumstances of a case.

Although the TFRP is generally applicable to the owners and principal officers of small or closely held business enterprises, many IRS Revenue Officers paint the penalty with too broad a brush. IRS Revenue Officers often assert Trust Fund Recovery Penalty – even when when legitimate defenses exist. In addition to owners and principal officers, IRS Revenue Officers will also often assert the TFRP against all individuals involved in the accounting aspects of the business, or who otherwise have check signing authority. Many times, Revenue Officers, unsupported by the facts and applicable law, will assess the TFRP against company bookkeepers and accountants; other individuals who have been named as officers for “convenience,” but who have no actual authority or control over the business; the spouses or other relatives of principal owners; and key company employees who have no control over the financial aspects of the business.

Unfortunately, assessment of the Trust Fund Recovery Penalty can create a difficult problem. The TFRP is often a very large amount and cannot be discharged in a bankruptcy. Once the penalty has been assessed against you, it can jeopardize your home or other property, ruin your credit rating, and interfere in your family life. If you are the potential target of an IRS assessment of the TFRP, or have been notified by the IRS that you will be interviewed in connection with the TFRP, the time to act is now. Experienced legal counsel can often make the difference.

Legal counsel is often retained to solve a Trust Fund Recovery Penalty problem months, or even years, after it has been assessed. This generally happens after the IRS has commenced enforced collection activity for an “old” TRFP liability, or a taxpayer is prevented from selling or refinancing his or her house due to a federal tax lien filed in connection with the original TFRP assessment. The potential solutions are varied and complex, and require skilled representation. At times, an offer in compromise, or a request for lien discharge or subordination will be the answer. Sometimes the solution requires payment of the withholding tax for one employee, followed by a claim for refund. Sometimes the problem can be resolved through IRS administrative appeal procedures; sometimes the solution lies in federal court litigation. In all cases, an attorney experienced in representing taxpayers in TFRP cases should be consulted.

If you are experiencing IRS collection activity for an old penalty, or are threatened by the prospect of a new Trust Fund Recover Penalty, please consider contacting me at The Gaymon Law Firm, PLLC, telephone (703) 407-9130, or by completing the Contact Form contained on this Web site.