When taxes are taken out of an employee’s paycheck, they should be immediately paid over to the IRS and state tax departments. Those paycheck withholdings are collectively referred to as the “trust fund” taxes.
One of IRS’s greatest priorities is the collection of paycheck withholdings that were never paid to the government. In doing so, IRS will determine whether someone within the business bore the “personal responsibility” for the non-payment of those taxes.
Then, to help collect those funds, the IRS will assess a penalty to that responsible person. The penalty equals the exact amount of taxes withheld from employees, that were never paid over the IRS and states.
IRS considers numerous factors when determining whether to assess the Trust Fund Recovery Penalty for payroll taxes. Here are two groups of factors:
One: Best Interests of the Government
Many accounts with liabilities under $25,000 move into a streamlined repayment plan, and avoid altogether the determination of personal responsibility. Regardless of the amount of the trust fund, revenue officers will make a reasonable attempt to collect the entire liability in full.
The Revenue Officer can still assess the TFRP, even if the amount is below $25,000. Some situations justify asserting the TFRP when the TFRP amount is below $25,000. IRS considers:
The in-business taxpayer’s potential to incur additional unpaid tax debt, when that business is not remaining current.
The business’s potential for additional liabilities from unfiled returns.
The business taxpayer’s history of late-filing, even extending beyond those periods with unpaid balances due.
The responsible person’s history of employment tax non-compliance.
Whether the business or responsible person has transferred any assets out of the business for less than their fair value.
Two: Factors from the 4180 Interview
IRS will conduct an Interview (completing an IRS Form 4180), to determine whether that person had a direct influence on the business’s decision not to pay over the tax. The Revenue Officer looks at:
- Who appears to be responsible?
- Who had a fiduciary responsibility (Corporation Officers, LLC Members, Business Partners)
- Anyone who should have collected the payroll tax and paid it to the government, but did not;
- Anyone who had the authority to pay bills, and actually paid any bills or liabilities, but did not pay the payroll tax;
- Who anyone acted with willful intent, if any? Basically, this means anyone that knew the tax was due and not paid, and failed in his or her responsibility to pay the tax.
One Last Note: Potential Criminal Penalty
This process to determine personal responsibility can result in a significant financial obligation upon someone. However, the very act of knowing the tax was due, and having the responsibility to pay the tax, but failing to do so is an exact example of willful conduct.
We tend to discuss willful conduct when reviewing or defending criminal tax matters. In these TFRP determination cases, anyone that may have acted with willfully could be found guilty of a federal tax crime. Imprisonment could result. Yes, it is that serious.
In those cases, the person under consideration should never speak with IRS. We always encourage anyone facing the 4180 interview to seek legal representation. Find a criminal tax lawyer that understands the risks you face, and always let your attorney speak on your behalf. Always.