Trust Fund Recovery Penalty

What is the Trust Fund Recovery Penalty Act?

The Trust Fund Recovery Penalty Act (formerly known as the 100% Penalty) was enacted in 1998 to assist the IRS in collecting back Payroll Tax Liabilities. A Trust Fund Tax is any tax that you hold “in trust” to be paid to the government. In short, you acted as the collector of the taxes and were supposed to turn the money over to the government. Fail to do so and the government will view this action as just a notch below robbery. You were holding their money and you spent it without their permission. Trust Fund Taxes mainly include payroll and excise taxes when you are dealing with the IRS, but if you are also experiencing a state tax problem remember that sales tax is also a Trust Fund tax and most states have similar penalties that they can assess you with.

How much of the total Payroll Tax Liability is considered held in Trust?

A payroll tax liability has four parts – your employees’ income tax (Trust Fund), your employees’ Social Security and Medicare (Trust Fund), the company matching contributions to Social Security and Medicare (not Trust Fund), and penalties and interest (not Trust Fund). 

Who can be assessed the Trust Fund Recovery Penalty?

The IRS can assess anyone within the corporation who they find to be both “willful and responsible” for the nonpayment of the payroll taxes. 

The willful person is whoever was in charge of paying the taxes and willfully chose not to pay them.  The IRS defines willful as “intentional, deliberate, voluntary, reckless, knowing, as opposed to accidental” but stresses that no evil intent is required. 

The responsible person is usually determined by status or position.  Ultimately, if you are the owner of a business, you are responsible, but the investigation does not stop there. The IRS is going to look for who controlled the finances, signed checks, and who decided which bills were paid.  This can include outside accountants, bookkeepers, etc.    The key here is that the IRS has to show both willfulness and responsibility.

Is there a time limit for the IRS to Assess the Trust Fund Recovery Penalty?

The IRS is given a three year statute of limitations to assess the Trust Fund Recovery Penalty and the clock starts once the tax is assessed (usually that means when the return is filed).  So if the business cannot pay the payroll tax debt off in full and soon the IRS will move forward with assessment of the Trust Fund Recovery Penalty. 

The 4180 Trust Fund Recovery Penalty Interview

The IRS has a form specifically used to determine “willfulness and responsibility”: Form 4180 “Report of Interview Held With Person Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Tax”.  The purpose of the 4180 Interview is to both find out if you were willful and responsible, and to see who else you’ll “throw under the bus”.

Can a Trust Fund Recovery Penalty Assessment be Prevented?

Yes, if you were truly not willful or responsible then you need to engage a tax attorney and file a Formal Protest to the Assessment within 60 days of receiving notice of the proposed assessment.  If you were willful and responsible then you can’t prevent it but with the help of a Tax Attorney you can delay it.  You need to act quickly and smartly.  Get help immediately.