Trust Fund Recovery Penalty Calculator with FAQs

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The Trust Fund Recovery Penalty is a penalty imposed upon responsible and willful individuals who fail to collect and/or pay over to the government as per 26 U.S. Code § 6672, taxes they are holding in “trust” for their employees. The most common application of 26 US Code 6672 is on payroll taxes. That is, taxes withheld by employers from salary or wages of employees for income tax or social security or medicare (commonly known as FICA tax ). These withheld money or fund are known as trust fund taxes. In a way, Govt & employees both had trust in the deductor that they will deposit these withheld amounts later to govt. treasury.

So, if the deductor (employer ) does not deduct or do not deposit to the U.S. Treasury after deducting the amounts within the specified period, they will owe a trust fund penalty which is known as Trust Fund Recovery Penalty (TFRP).

Trust Fund Recovery Penalty Calculator

Trust Fund Recovery Calculator

Who are responsible and willful individuals for the purpose of TFPR?

Unlike many other penalties, the trust fund recovery penalty is imposed on certain individuals working or related to a corporation or business entity who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. IRS has given some clear cut guidance about such responsible person :

  • An officer or an employee of a corporation,
  • A member or employee of a partnership,
  • A corporate director or shareholder,
  • A member of a board of trustees of a nonprofit organization,
  • Another person with authority and control over funds to direct their disbursement,
  • Another corporation or third party payer,
  • Payroll Service Providers (PSP) or responsible parties within a PSP
  • Professional Employer Organizations (PEO) or responsible parties within a PEO, or
  • Responsible parties within the common law employer (client of PSP/PEO).

To establish responsibility, the IRS has to prove two things. First, that the individual in question was responsible for remitting the taxes and secondly he/she was knowing that the taxes were due and purposefully or willfully ignored the law.

How do you know if you are charged TFRP ?

The trust fund recovery penalty or TFRP appears as notations for Civil Penalty, CIV-PEN, or 6672 Penalty in any tax bill or tax transcripts that IRS sends you.

Is Employer’s Matching Contribution Included for Imposing Tax Refund Penalty?

The trust fund recovery penalty does not include the employer’s matching portion of the Social Security and Medicare tax. It also does not include the penalties and interest that have been assessed to the business as part of the total employment tax liability. The IRS typically only holds a business responsible for non-trust fund taxes if they aren’t paid to the government. It does not hold individuals responsible.

How Much Is the Trust Fund Recovery Penalty Amount?

The Tax Fund Recovery Penalty is equal to 100% of the aggregate of the following taxes

  1. amount of  unpaid income taxes withheld,
  2. employee’s portion of the withheld FICA taxes
  3. any excise tax collected but not paid

How does the IRS Assess a TFRP?

When IRS decides to assess the TFRP against you, they will send you a notice/letter stating clearly that they are going to pass an assessment order for TFRP. The notice will provide a time limit of 60 days (75 days if this letter is addressed to you outside the United States) from the date of notice/letter to appeal their proposal to assess TFPR. They will also want to conduct an interview known as a 4180 interview (which is based on IRS-Form-4180). Once the IRS identifies who was responsible and willful, they will assess the penalty.

What Forms Are Involved in the TFRP?

Following forms are involved in the process of assessment for trust fund recovery penalty.

  1. Letter 1153 -this is the notice the IRS sends when the business has refused to pay the payroll taxes, and the IRS has decided to hold an individual personally responsible for the debt. Accompanying this letter is
  2. Form 2751. This form accompanies first letter no 1153. Once you sign From 2751, it is an admission that a person is responsible for the unpaid payroll tax.

Therefore if a person doesn’t agree with the letter 1153, then he/she should not sign Form 2751 and immediately find a tax attorney to prepare for grounds of appeal for which IRS notice provides 60 days.

TFRP?

If the IRS assesses a penalty, it has up to 10 years to collect it. During that time, if you have not made arrangements to settle/pay the penalties, then you can be subject to “enforced collections” (i.e. the IRS attempting to seize assets, garnish wages, offset refunds, etc.).

However, the IRS only has 3 years to assess the penalty. This clock starts ticking on April 15 after the year the trust fund taxes were due to be filed. For instance, let’s say a company was supposed to pay some trust fund taxes in October 2019. The IRS has three years from April 15, 2020 to assess the penalty. If the IRS doesn’t do anything by April 14, 2023, it can’t do anything after that date.

How Can You Settle the Trust Fund Penalty?

Like other types of tax debt, there are options to pay this penalty. If you don’t have the full payment, you can apply for a payment plan (a.k.a installment agreement). Alternatively, you can try to settle the debt for less than you owe through the offer in a compromise program or through a partial payment installment agreement.

The important thing to note is that you should contact the IRS and set up an arrangement before the IRS tries to garnish your wages or seize your assets. It is also important to note that these penalties can not be discharged in bankruptcy.

Is the Trust Fund a Tax or a Penalty?

The Trust Fund portion of an employment tax debt can be confusing for a taxpayer experiencing it for the first time. Trust Fund is what people commonly call the Trust Fund Recovery Penalty (TFRP). It is a penalty assessed to an individual in the amount of a specific segment of a business payroll tax liability. It is referred to as the Trust Fund while it is still a business tax liability. Once it is assessed to the individual, it is referred to as a Civil Penalty on letters, notices, and other IRS documents.

Since the individual(s) didn’t actually accrue the tax debt, it cannot be assessed as true tax liability and is therefore assessed as a Civil Penalty in the same amount of the business Trust Fund tax. It is not added on to the business debt or collected twice from the individual(s) and business. The Trust Fund may be collected only once but from more than one source.

This means that if the total Trust Fund is $50,000 and the assessed individual pays $25,000 toward the Civil Penalty (TFRP / Trust Fund), both the individual Civil Penalty and the total business tax debt will be reduced by the $25,000 payment.

The Trust Fund Recovery Penalty is a portion of the business employment tax and therefore the business is not eligible to request abatement or removal of it.

What are TFRP Assessment Statute Period?

Assessment Statute Dates (ASEDs) for completing the assessment are as under :

If it pertains to FICA, then three years from the succeeding April 15th or three years from the date return was filed; whichever is later.
Example 1: 3rd QTR 2018 941 filed timely. ASED begins 4/15/2019
Example 2: 3rd QTR 2018 941 filed 5/30/2019. ASED begins 5/30/2019
Example 3: 3rd QTR 2018 941 filed 11/30/2018. ASED begins 4/15/19

An excise or Railroad Retirement Act: Three years from the due date of return,
without regard to any extension; or three years from the date return was filed;
whichever is later.

There are no Trust Fund ASEDs for SFRs, unfiled returns, willful attempts to
evade tax, or false / fraudulent returns.

By Prashant Thakur

Prashant Thakur is a tax advisor . He has written two books on tax laws of India. He regularly writes on his paid-only website http://taxworry.com. He is learning about the Internal Revenue Code of USA as many of clients and readers are of India origin and also are tax resident of USA . So . solving their tax issues require reference to IRC of USA.

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