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IRS Trust Fund Recovery Penalty
If you are behind on Payroll Tax and not sure where everything stands with the IRS, as licensed Tax-Practitioners, we can perform a Free Confidential Check-Up with the IRS to confirm status of all issues (on the business and on your personal side) to effectively determine where you are and the steps that need to be taken to ensure you get through these issues in the very best manner possible. Once the review is complete, you can decide if you want our help. Either way, you will finally know what can be done and not be left feeling like you have no idea where to turn or what to do to protect yourself and/or business.
Payroll taxes are a special kind of tax – what’s referred to as a “Trust Fund” Tax -- where an employer collects tax on behalf of the government by withholding from employees pay in “trust” that the tax withheld will be deposited to the US Treasury.
If these deposits are not made, the IRS will actually assess you personally to collect on all tax withheld from employees pay that was not deposited. You do have a right to an interview before this assessment to determine if you are a willful and responsible party for the non-payment of tax but if you are an officer/owner of the business, we strongly caution you to get assistance before it's too late.
If you are at a point where you are behind on Payroll Tax but not yet to the point where the IRS is pursuing action against you, you can avoid all of the headaches if the proper steps are taken.
If the IRS has already assessed you personally, your balances will be coded as an IRS Civil Penalty. The IRS assesses a civil penalty whenever a taxpayer fails to abide by IRS regulations and these Civil Penalties refer to fines or penalties the IRS assesses to your tax bill as opposed to criminal penalties that could result in jail time. The most common type of Civil Penalties are Failure-to-File Penalty, Failure-to-Pay Penalty, Accuracy-Related Penalty, and personal liability on unpaid tax from a business (typically delinquent 941 Payroll Tax). You can learn more about these different penalties below.
If you owe Civil Penalties to the IRS, are behind on Payroll Taxes, or currently dealing with an assessment on a Trust Fund Recovery Penalty, please allow our in-depth information below to assist you in learning how Colonial Tax can effectively reduce and resolve your IRS Civil Penalties and/or Business-Related Tax Issues.
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Trust Fund Recovery Penalty
What is the Trust Fund Recovery Penalty?
The Trust Fund Recovery Penalty (TFRP) is any tax that you hold “in trust” to be paid to the government. For example, if you have employees, you withhold money from your employee paychecks to pay their taxes to the IRS. You might also collect sales or excise tax when you sell goods and you are holding this sales/excise tax to then be deposited over to the government. In short, you act as the collector of the taxes and it is your responsibility to turn the money over to the government by certain deadlines. If you fail to do so, the government will view this as just a notch below robbery. You collected their money but didn’t actually give to them.
That is the exact reason that the IRS and many states have the Trust Fund Recovery Penalty. Whoever is holding the money or spent the money must be held accountable for paying the government back what it was owed. If one of your employees gets a tax refund at the end of the year from the IRS, the IRS is obligated to pay your employee that money, even though the IRS never actually received the tax money. The IRS loses a lot of money on the deal, and they are going to go after whoever they can to collect on this debt.
Can the IRS collect against you personally?
The Trust Fund Recovery Penalty allows them to do just that. They assess you personally for the Trust Fund portion of the taxes. Keep in mind a payroll liability, for example, 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). So really if the company was to go bust and you were left to pay the bills, the penalties, interest, and matching contributions would go away and you are only personally on the hook for the Trust Fund portions.
Who Can the IRS Hold Personally Responsible to Pay the Debt?
The IRS is going to try and assess anyone they determine to be the “willful and responsible person.”
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. They do not need to show that there was a conspiracy to not pay the taxes, just that it was a conscious and knowing decision. They need to show that you were aware, or should have been aware, of your tax obligations.
The responsible person is usually determined by status or position. If you are the owner of a business you are, ultimately, responsible for the taxes. The old leadership saying is that “you can delegate authority but not responsibility”, and this is true with the taxes too. But successful arguments have been made if that authority was delegated to someone else and they hid the fact that the taxes were not being paid.
In general the IRS is going to look for who had control over the finances, check signing authority, who decided which bills were paid and not paid, and who collected the taxes.
Between willfulness and responsibility, there could be many people who the penalty is assessed against. It can be used against business owners, accountants, bookkeepers, etc. The key here is that the IRS has to show both willfulness and responsibility. One out of two isn’t good enough.
A successful defense is going to try to disprove one or the other, or sometimes both. Only one is needed but it never hurts to have a few extra bullets in your gun when you’re going into the fight.
If you have any questions about your particular case and the kinds of solutions that will be available to you, Contact Us, and we will outline a very specific strategy to ensure optimal outcome to your issues.
Form 4180—Trust Fund Interview
What is the 4180 Trust Fund Interview?
The entire purpose of this interview is to enable the IRS to find out if you were willful and responsible, and to find some other names of people that they may be able to implicate, as well. They are trying to dig up as much dirt as they can against you and, like most things involving the Trust Fund Recovery Penalty, we recommend that you bring an Attorney to this meeting.
Each person being interviewed will be asked the same series of questions and these responses will be recorded by the Revenue Officer. The Revenue Officer will conduct the interview in person or over the phone on an individual basis as each person must give their own answers to each question. This allows the IRS to compare these answers to help determine who is ultimately responsible. Sometimes only one person might be liable and other times it could be every single employee.
In any case, if you are being interviewed, it means that a Trust Fund Recovery Penalty is at least being considered by the government. In reality, it probably means that it will be assessed unless you can put up a defense right then and there and convince them that you were either not willful, not responsible, or neither of the two. This is where we need to start prepping for the resolution of the actual assessment. The interview is not the end of the world…It is just the starting point in this process and what happens from here on out will be absolutely critical!
How do I know if the IRS is considering me liable?
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” (Although it may be the longest title ever known for a form it can be confusing). Most people just scratch their heads and try to break it down an figure out what this is actually trying to say.
If your Revenue Officer ever asks for a meeting with you and starts asking things like “Do you have check signing power?”, “Does anyone else have check signing power?”, “Did you hire / fire employees?”, “Did anyone else hire/fire employees?”, etc. YOU ARE BEING INTERVIEWED to determine if an assessment can be issued against you.
Who Can Be Interviewed?
Again, the purpose of the interview is to enable the IRS to determine who was responsible for the non-payment of the taxes. When a business has delinquent Payroll Taxes, the IRS is required to conduct this 4180 Interview to identify each and every member of the business who could have been responsible for withholding taxes from employees pay, making quarterly tax deposits, and making the financial decisions on behalf of the business.
The IRS will almost always request interviews from anyone listed as a corporate officer, partners, bookkeepers, secretaries, shareholders, and even someone who simply has check-signing authorization for the business.
Do I have to Participate in Interview?
Yes, if you do not participate in the Trust Fund Interview, you will likely receive a Summons to meet with them and this can result in being forced to disclose documentation that far exceeds what could be required via the more simply Interview.
At the same time, if you refuse to conduct the 4180 Interview, the Revenue Officer will automatically assess you with a Trust Fund Recovery Penalty as you were not able to argue that you were neither willful or responsible for the not-payment of these Payroll Taxes. You may even be held more liable than if you would have just gone through with the Interview.
Can We Handle the Interview on Your Behalf?
Unfortunately, you cannot have someone do the interview for you. However, we always recommend that we are present at the meeting or are on the line for a conference call (preferred) so we can advise as to what you must answer and what you are not required to answer. We can never answer questions for you but we can coach you ahead of time and even intervene whenever the Revenue Officer is overstepping his or her authority. The best approach is to be buttoned PRIOR to the interview and to allow us to provide some good preparation so this is a non-invasive process.
Form 2751—
Proposed Assessment of Trust Fund Recovery Penalty
What is the Form 2751?
If, through the 4180 Trust Fund Interview, you have been considered to be responsible for the non-payment of tax, you will receive a Notice from the IRS that will consist of two parts. The first part will be an IRS Letter 1153 (DO), which is simply a notification that you have been deemed responsible and that you 60 Days to protest the Proposed Trust Fund Assessment.
The Proposed Trust Fund Assessment will be attached to the last page of the Letter 1153 (DO) and this is the Form 2751.
What is contained in the Form 2751?
The Proposed Assessment will disclose the name of the person being assessed, the type of tax that has caused this Trust Fund Assessment (typically 941-Payroll Tax), and the amount of Penalty the IRS has assessed against as a result of the non-payment of this tax.
This form is simply a “Proposed” Assessment and you have 60 days to protest if there is grounds for such a protest. If there is no way to avoid the assessment, it is often times beneficial to just sign the Form 2751 so you can move directly into the resolution phase of this process.
Are You Required to Sign the Form 2751?
No, you are NOT REQUIRED TO SING THE FORM 2751. If you have a defense and we can show you were either not willful OR not responsible for the non-payment of tax, then do not sign this Form. We can then submit a Formal Protest to the Revenue Officer within the 60-day protest window. Be careful, this 60-day clock is based upon the date that appears on the Letter 1153.
If you do not sign the Form 2751 and you do not issue a formal protest within the allotted window, the Proposed Assessment will automatically be assessed against you and collection efforts can then start being enforced soon thereafter.
Be smart and adhere to the advice of your experienced representative as you are going to want to make life easier on yourself later in this process. Pick your battles!! The exact calculation is complex -- but we can compute an rough estimate of what you are going to owe. It's much easier to determine best options once we are able to understand the type of balances that will be on the table!!
If you want an exact number, call us and we will tell you what documents we need from you to calculate it.
When you pay your employees, your Company also matches the Social Security and Medicare withholding and pays that to the government too. The Company matching portions are not Trust Fund and cannot be assessed against the owners of the Company personally. Additionally, any penalty and interest that has accrued on the corporate tax accounts is not Trust Fund and cannot be assessed against the owners of the Company.
IRS Letter 1153 (DO)
The letter will be dated and you have 60 days from that date to respond. You are given three choices:
1. Sign the enclosed Form 2751, agreeing to the assessment.
2. Do nothing, which is basically the same as pleading “no contest” (the IRS calls it “unagreed”). After the 60 day deadline if you have not responded, you will be assessed.
3. Fight it: the letter will contain instructions on the correct format of your protest. There are two formats, a “Small Case Request” and a “Formal Written Protest”. If any period has a Trust Fund balance higher than $25,000, we must use the long format. It doesn’t matter what the total balance is, just what the highest balance in a single period is. Otherwise you use the short format. We hope that makes sense.
How Can I Protest the Assessment?
If we are protesting the assessment, we will need to include arguments relating to willfulness and responsibility (I can’t say this enough, although I’m sure you are seeing this common theme). We would send this protest directly to the Revenue Officer who issued the 1153 letter once it is complete and as buttoned-up as possible.
If our protest persuades the Revenue Officer to change his/her mind, then we are done, although this doesn’t happen often and we don’t want to create any misleading optimism. Once you are this far along, the Revenue Officer is very likely going to assess you. We would advise you as to whether there are grounds for a defense so time is not wasted and can be spent on more important steps in this process that will actually benefit you.
Any Chance for Appeals Rights?
If we do have a strong case to protest the Assessment, we always recommend to include a request at the end of your protest that states you want the case forwarded to the Office of Appeals if Revenue Officer still plans to assess the penalty. You also have the option of contacting the Revenue Officer and making an informal agreement to prevent the assessment, but make sure that the 1153 is properly withdrawn. If you think you made a deal but he never withdraws the 1153, 60 days from the date of the letter you may still be assessed. This is the kind of thing you need to keep an eye on!
A final note on Appeals: the Trust Fund Recovery Penalty will not be assessed until your appeal is heard, no matter what. Why is that important? The workload of the Office of Appeals typically goes something like this, in order of priority:
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Collection Appeals (which must be heard within 48 hours or receipt, so they are always first priority).
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Collection Due Process Appeals.
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Trust Fund Recovery Penalty protests.
Right now the IRS simply doesn’t have the manpower to deal with Appeals in an efficient manner, so a lot of the time just filing your protest with the Office of Appeals will delay the Trust Fund Recovery Penalty. I had one client who waited 2 years for his protest to be heard, though that Appeals Office was busier than most. There will be some delay though.
Delinquent Payroll Taxes (941 Tax)
How Can I Resolve Back Payroll Taxes?
If behind on Payroll Taxes, it is important that you fully understand what you are “required” to disclose versus what the IRS “wants” you to disclose if you want to protect yourself from aggressive collection efforts. Often times, they will request information you are not required to disclose as a tactic to escalate collection efforts. You are not able to reverse information that has already been shared so please be careful! We can assist you in understanding all of this. Just let us know what is going on so we can help.
Like any resolution with the IRS, resolving back payroll taxes means that your company needs to get a formal resolution in place such as a payment plan, an offer in compromise, or have your accounts placed into currently not collectible status.
By establishing a formal resolution, you ensure that the IRS will not take aggressive action against your company to collect the taxes such as bank account levies, accounts receivable levies, and seizures of property.
Why Should I be Concerned About Unpaid Payroll Taxes?
The Department of Treasury is reliant upon all taxes that are withheld form employees pay on W-2 Income to be deposited to the IRS as these funds are what are used to keep different government divisions funded. Whenever you have W-2 employees, you will deduct not only Federal and State (if applicable) Income Tax but also Social Security, Medicare, and Unemployment. If you then keep what was withheld and do not deposit these funds to the IRS, the government will view this as theft as you hold onto money that did not belong to you or your business.
Whenever these deposits are not made, it can cause a multitude of problems and within the court of public option, the IRS should pursue aggressive collection action against these “stolen” funds as it is can directly impact all other taxpayers.
In court of public opinion, these are examples of why the IRS must hold you accountable as it results in underfunding of multiple programs:
1. Many W-2 Employees file Returns and receive Refunds each year. The IRS never received the tax money that was withheld, yet the employee is entitled to receive a Refund because they actually did have the funds withheld from pay.
2. IRS Did not receive the Social Security or Medicare contributions that were withheld from employees pay and these funds are what are used to fund other taxpayers benefits.
3. The failure of one business to pay their Payroll or Corporate Taxes can create an unfair business advantage over other businesses who are meeting their tax obligations.
This is why the IRS will actively pursue the Trust Fund Recovery Penalty Assessment against any officers of the business or anyone who is considered willful and responsible for non-payment of tax.
What Do I Need To Do To Put a Formal Resolution Into Place?
On the surface, handling a back payroll issue is similar to any other delinquent tax issue. Before you can propose any kind of resolution with the IRS you must do the following:
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Start Paying Your Current Tax Deposits on Time: you cannot enter into any arrangements with the IRS for back payroll taxes until you are making your current tax deposits on time. This is because the IRS wants to ensure that paying your taxes will not be a problem in the future.
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File All Missing Tax Returns: If you have any tax returns that have not been filed and that are past due, you must file these returns before the IRS can consider any arrangement to resolve your debt. The IRS forces you to do this to get you back into compliance and to ensure that any agreement they make with you covers all of your tax debt, including potential issues!
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Complete a Financial Statement: the IRS will require your business to complete a full financial statement disclosing all of the assets, liabilities, income, and expenses of the company. They use this financial statement to determine what kind of monthly payment they will require from you. Can’t reiterate enough how important it is that you truly understand what is required to be disclosed. Don’t just volunteer information that can jump up and bite you.
Failure-to-Pay / Failure-to-File Penalties
What are the Penalties for delinquent 941 Payroll Taxes?
You can be hit with 3 different types of penalties if you failure to file, failure to pay, and failure to keep up with your timely tax deposits.
1. The Federal Tax Deposit (FTD) Penalty will be charged against you if you are not current AND if you fail to use the EFTPS (Electronic Federal Tax Payment System) to pay these FTDs. The most common error that business owners make is failing to keep current on all quarterly tax deposits.The magnitude of the FTD Penalties is going to be based upon the severity and how late the deposits were made.
Here is a quick breakdown to demonstrate the escalating penalties:
2% - deposits made 1 to 5 days late (yes, even if one day late).
5% - deposits made 6 to 15 days late.
10% - deposits made 16 days or more late, but on or before the 10th day after the date of the first notice we sent you asking for the tax you owe.
10% - deposits made to an unauthorized financial institution, or payments made directly to the IRS, or paid with your tax return.
10% - Amounts subject to electronic deposit requirements but not deposited using EFTPS.
15% - Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you receive notice and demand for immediate payment, whichever is earlier.
2. Failure to File (FTF) and Failure to Pay (FTP) are a combined penalty. The IRS charges a combined penalty of 5% of the unpaid tax for each month (or part of a month) the return is late. This 5% will consist of 4.5% for filing late and 0.5% for paying late. Doesn’t sound too bad until you begin to tack on the additional 0.5% penalty for each month it is late. Sometimes, you have a total FTD/FTP/FTF penalty that is 50% of your total debt. The good news is, the FTF and FTP penalties will max out at 25% so it can’t be limitless accruals.
Do I Need Professional Representation?
It is strongly advised that you seek professional representation if you are behind on Payroll Tax, as the IRS is much more aggressive in pursuing delinquent Payroll Tax than any other form of tax. There is also a very good chance that a Trust Fund Recovery Penalty is out there waiting to be assessed. It is best to be as proactive as possible throughout all phases in this process!
You are going to be ok and we can save your business and protect you as an individual. There is just a process that needs to be taken to get you there!
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3 Steps to Successfully Resolving Payroll Tax (941 Tax) Issues
Step 1--Understanding of Issues:
Call us so we can discuss your tax issues. We want to know the type of tax issues you are having and if you have received any recent IRS Notices. This will allow us to evaluate your best options in resolving your tax debt with the least amount of financial burden possible.
Step 2--Confidential Check-Up:
We will conduct a free "behind-the-scenes" checkup on your behalf to uncover everything that needs to be known about where things stand with the IRS. This allows us to provide a complete evaluation and to ensure you are provided with feedback you can trust! We will be able to see where things stand with the Business as well as confirm what your status is Personally!
Step 3--Confirm Candidacy:
We review your candidacy for all resolution options and make sure you are advised of the type of outcome you can expect if everything is handled properly and within your rights as a taxpayer. You will have all the information you need to finally make informed decisions!
What are Your Resolution Options?
We handle ALL IRS-Related Tax Issues and our defined area of specialization allows us to implement whatever strategy is best suited to your particular set of circumstances. We will outline a very specific plan that will include the following:
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Personal Offer in Compromise (Doubt as to Collectability) Settlement.
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In-Business Offer In Compromise settlement.
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Negotiation of an Installment Agreement (with or without financial disclosure!).
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Negotiation of a Formal Request for Abatement (forgiveness) of Penalties.
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Effectively eliminate tax debt through utilization of 10-Year Collection Statute.
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Protest of personal tax assessments for business tax debt.
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Application for Discharge or Subordination of Federal Tax lien.
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Negotiating for file to be put in Currently Non-Collectable Status.
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File for Request of Lien Withdrawals once probationary payments have been made.
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Innocent Spousal Claim.
*We will also Prepare and File any Missing Tax Returns to ensure Filing Compliance
--This includes confirming what years need to be filed and obtaining all income information directly from the IRS.
Your Next Steps
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