The Trust Fund Recovery Penalty, Part 1: What is it and when can the IRS use it?

Uncle Sam is very serious about collecting income and employment taxes that are supposed to be withheld by businesses.

To be sure, the IRS is serious about collecting other taxes too. But with employment taxes, the agency has an additional and potentially powerful tool: the trust fund recovery penalty (TFRP).

In this two-part post, we will discuss what the TFRP and when the IRS can make use of it.

Trust fund taxes are taxes that go into specified funds. Social Security and Medicare taxes are probably the best known example. But there are others, including railroad retirement taxes and certain excise taxes.

Employers have obligations to collect and withhold appropriate amounts from employees and make payments to the federal government at proper intervals. If you willfully do not do this as an employer, you can be hit with the TFRP.

The TFRP is found in Section 6672 of the Internal Revenue Code. It potentially applies to a broad group of people considered responsible for compliance with trust fund requirements.

This group extends well beyond owners and managers. It can also include corporate directors, payroll service providers (PSPs), shareholders and others. But just because a broad group is potentially on the hook for the TFRP doesn’t mean the IRS is always justified in imposing it.

For one thing, the IRS has to give proper notice of its intention to assess the TFRP. In part two of this post, we will take note of a case in which the IRS failed to this.

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