The IRS Trust Fund Recovery Penalty: What Happens If You Don’t Pay Those 941s?
Sometimes bad things happen to good people. A good business can also go through difficult times. Often times when a corporation gets into financial trouble, the IRS becomes an unwilling lender. This happens when payroll taxes collected from employees or excise taxes collected from customers are not sent to the IRS, but are kept for current cash flow. The landlord can “plan” to pay it back once “things get better,” but it may never get paid or the IRS may move quickly to collect. This can lead to the imposition of the Trust Fund Recovery Penalty (TFRP) against responsible corporate officers.
Except for very small payroll, employee tax withholdings are remitted through the Federal Tax Deposit (FTD) system at the bank or electronically through the Electronic Federal Tax Payment System (EFTPS). The IRS monitors these payments and if they stop coming in, you can generate an “FTD Alert” for a local IRS Revenue Officer (RO). That RO will contact the business to find out why the payments have been late. If a valid reason is not found (there are no more employees) or a solution cannot be negotiated, he or she can conduct a TFRP investigation.
Before the TFRP can be evaluated, interviews are typically conducted with the president and other corporate officers, as well as with the board of directors. This is done using Form 4180. It is often called a “4180 Interview.” The Revenue Officer will want to take the interview in person, but taxpayers have the right to be represented by a CPA, Registered Agent, or Attorney. Based on the interviews, the RO will decide who to investigate further. In addition to the 4180; bank records, corporate minutes, data from the Secretary of State about the corporation, etc. will be examined.
Controlling shareholders who may not be an officer or director are potential TFRP targets if they exerted influence over the bills that were paid, etc. If you are an office manager or secretary, you may not necessarily be immune to TFRP. Circumstances are important. The most important topics are knowledge, authority and execution. Also, the IRS can use state laws when they are in your favor. In some states, the directors of a corporation are expressly charged with ensuring that taxes are paid.
If you are asked to submit to a 4180 interview, obtain professional representation before meeting with the IRS. Each interviewed party should have their own representative to avoid a conflict of interest. You don’t want to be your boss’s “scapegoat.” Complete a 4180 before meeting with the Internal Revenue Service (IRS) and stick with the facts when interviewed by the RO. You should be honest, but you do not have to give more details than what is required on the form.
Although the Internal Revenue Service (IRS) hates it, you have the right to make an exclusive payment of the trust fund tax to exclude the TFRP. If your corporation has little or no assets, paying the Trust Fund only (plus the net asset value of the assets) could result in a settlement for less than the total owed by the corporation without having to make an Offer in Compromise. This is very complicated and generally only applies to defunct corporations. It must be a legitimate transaction and fraud cannot be contemplated. Don’t try it without professional tax help! If you are in business, the IRS will attempt to obtain full payment, if possible, from each and every legal source. An offer in compromise for a going concern is nearly impossible under current IRS policy.
If the Trust Fund is not paid, each individual who the RO believes is a “responsible person” under the Internal Revenue Code will receive a letter proposing the penalty and given 30 to 60 days to respond. Those individuals must file a timely protest or the penalty will be imposed. Due to the negative impact of a federal tax lien, it is very important to protest against the TFRP in a timely manner if you think you can count on a strong defense. Once assessed, the unpaid trust fund tax collection can be done with personal assets, not just corporate assets. The Internal Revenue Service (IRS) can file a federal tax lien and take enforcement action on personal property and real estate owned by a “responsible person.”
Sometimes an RO is careless and simply assesses the penalty against anyone they can bring the least case against. I have seen wives accused of TFRP who had nothing to do with the corporation, were not involved in management, did not write checks, etc. There is a good chance of winning an appeal in that case. If you are a secretary and you did not have the independent authority to pay bills, but you did so solely on the direct order of the president or controller, you may have a good defense. Each case is judged on individual merits. Get a CPA, enrolled agent, or attorney experienced in tax representation to assist you as soon as possible. Do not hire clothes that you see on television or that a smart salesperson “sells” them. Insist on speaking with a licensed professional before hiring a company to help you.
If you are in charge of the TFRP and you know the appraisal is valid, work with the IRS to get it paid. Don’t linger or stick your head in the sand. Look for loans or other means to pay the IRS. Provide the IRS with all financial information they require when requested in consultation with your tax professional. The IRS considers collecting payroll taxes a top priority. More than ever in recent memory, the possibility of criminal prosecution for payroll tax evasion is possible. It is very rare, but the threat is real. Take payroll taxes very seriously.
IRS Circular 230 Disclosure: The discussion of US federal tax matters contained in this article is not intended or written to be used, and may not be used, for the purpose of (i) avoiding valid penalties under the Internal Revenue Code or, commercialize or recommend to another party any transaction or matter related to taxes[s] designed to avoid paying taxes owed to the United States. Under this article, no “covered opinion” is provided under IRS Circular 230.