If you or your company is responsible for withholding and paying an employee’s federal or payroll taxes, the IRS will assess a penalty if those taxes do not get paid. Here is what you need to know about the Trust Fund Recovery Penalty (TFRP).
What Is the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty (TFRP) is an IRS penalty. In summary, it is levied on individuals or businesses with a responsibility to withhold and pay taxes on behalf of an employee. Basically, the IRS assesses the penalty when it feels the responsible party or parties have willfully failed to pay these taxes.
It is called the Trust Fund Recovery Penalty because withheld taxes are generally held in trust funds until they become due. For this reason, the IRS refers to them as trust fund taxes.
Who Is Responsible For the TFRP?
The person, persons, or business responsible for withholding and paying an employee’s taxes is responsible. In some cases, a TFRP gets assessed because a business has become defunct at some point during the year. Therefore, since the business was not operating at tax time, it did not pay the trust fund taxes it had withheld when it was operational. Specifically, the TFRP responsibility could fall to an officer or corporate director.
How Much Is the Trust Fund Recovery Penalty?
The TFRP penalty has two components. The total amount of the federal taxes withheld and placed in trust and the employee’s portion of the withheld FICA taxes. As such, the sum of these two values is the penalty amount.
Can You Appeal an IRS Trust Fund Recovery Penalty?
Yes. Once you receive notice that the IRS plans to assess TFRP, you have 60 days to start the appeals process. IRS Publication 5 lays out the steps for filing an appeal. Keep in mind, if the IRS mails your notice to an address outside of the United States, you have 75 days to initiate the TFRP appeals process.
What Collection Actions Can the IRS Take When They Assess TFRP?
The IRS can take similar collection actions on a Trust Fund Recovery Penalty balance as they can on a personal or business tax balance. Specifically, they can file a federal tax lien, garnish your wages, levy your bank account, or seize property. Therefore, it is critical not to ignore these notices.
How Do Business Owners Avoid TFRP?
You can avoid a TFRP by making sure that you are withholding the correct amount of taxes from all of your employees’ paychecks. Moreover, make sure that you are paying those taxes out of the trust fund account by the due date each year.
Is It Possible to Get IRS Trust Fund Recovery Penalty Abatement?
Yes, the IRS will consider abating the penalty portion of the TFRP if you correct the delinquency by paying your employees’ withheld taxes.
Does the IRS Offer a Trust Fund Recovery Penalty Offer in Compromise or Other Relief?
Yes, you can receive an Offer in Compromise for a Trust Fund Recovery Penalty. However, it can never be for less than the amount of federal income and payroll taxes you owe the IRS on behalf of your employees.
You can learn more here: “Payroll Tax Relief: Settle Payroll Tax Debt and 941 Issues” and here: “Payroll Tax Issue: Employer Messed Up My Taxes”
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