There are many different tax terms out there. There’s a good chance you’ve probably never heard of most of them until you’ve been impacted directly or indirectly. One of those terms: Trust Fund Recovery Penalty – or TRFP.
According to cornelllaw.edu, A trust fund recovery penalty (TFRP) is a hefty fine charged for an employer knowingly or willfully keeping employee FICA and income taxes owed to the IRS. Employers retain taxes owed by an employee to the IRS from their paychecks and submit them into a trust. The IRS requires this money to be paid on a periodic basis to the IRS, usually quarterly. If a corporation or individual uses this income instead of remaining in trust, the IRS will give them a trust fund recovery penalty equal to the taxes withheld.
So, what do you do if you find yourself hit with a TFRP? The IRS can be quite aggressive when it comes to collecting these funds, so read on for specific guidance that can help guide your next steps.
Who Can Be Held Responsible for a Trust Fund Recovery Penalty (TRFP)?
The IRS has guidelines for who can be held responsible for a TRFP. According to irs.gov, “If you are a person responsible for withholding, accounting for, or depositing or paying specified taxes including NRA withholding and employment taxes, and willfully fail to do so, you can be held personally liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest.
The IRS defines a “responsible person” as:
- an officer of a corporation
- a partner
- a sole proprietor
- an employee of any form of business.
- a trustee or agent with authority over the funds of the business
“Willfully,” according to the IRS, “means voluntarily, consciously, and intentionally. You are acting willfully if you pay other expenses of the business instead of the withholding taxes.”
Common Scenarios That Might Lead to a TFRP:
While TRFP’s aren’t a common, every day occurrence in the grand scheme of businesses in operation, some common scenarios can lead to this issue:
- Cash flow issues leading to delayed payroll tax payments
- Miscommunication in small businesses.
- Errors by third-party payroll providers.
- Stress the importance of oversight and internal controls.
What To Do If You Receive A Trust Fund Recovery Penalty
While TRFPs can be resolved, you mustn’t take this penalty lightly. It will not go away on its own, and the IRS can be quite aggressive about recovering money owed to the federal government. The IRS can even access your personal assets or, in some cases, pursue criminal charges if a TRFP is not properly addressed. You need to obtain legal representation should you find yourself in this scenario. We can pursue specific legal strategies to help resolve your TRFP, including negotiating with the IRS for an installment plan or an Offer in Compromise.
How The Lapidus Law Firm can help with a TRFP
Michael Lapidus knows tax law in DC and Maryland. He is a Georgetown Law graduate and an experienced litigator with a strong track record. He has experience helping both individuals and business owners navigate complex legal systems, including tax disputes, including those cases that include complex regulatory tax challenges.
If you get hit with a Trust Fund Recovery Penalty, stay calm but act quickly, don’t speak to the IRS without legal representation, and contact Michael Lapidus at The Lapidus Law Firm for a free, confidential consultation at 202-785-5111.
Written by Michael Lapidus