The 26 US § 6672: Trust Fund Recovery Penalty

The 26 US § 6672 (TFRP) Trust Fund Recovery Penalty

There are many different aspects of the Internal Revenue Code that US and International Taxpayers – especially business owners — have to be cognizant of when navigating their IRS tax responsibilities. One very important code section is 26 USC 6672 – which refers specifically to federal withholding and employment taxes. When an employer willfully fails to withhold taxes, they may be subject to penalties. This is especially important for nonresidents who relocate to the United States and begin operating their own businesses. The purpose of the code section is to enforce the Trust Fund Recovery Penalty. Let’s take a look at 26 USC 6672 (Failure to collect and pay over tax, or attempt to evade or defeat tax):

26 US § 6672

In pertinent part:

(a) General rule

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 or part II of subchapter A of chapter 68 for any offense to which this section is applicable.

(b) Preliminary notice requirement

• • • In general

      • No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) or in person that the taxpayer shall be subject to an assessment of such penalty.

    • Timing of notice

      • The mailing of the notice described in paragraph (1) (or, in the case of such a notice delivered in person, such delivery) shall precede any notice and demand of any penalty under subsection (a) by at least 60 days.

    • Statute of limitations

      • If a notice described in paragraph (1) with respect to any penalty is mailed or delivered in person before the expiration of the period provided by section 6501 for the assessment of such penalty (determined without regard to this paragraph), the period provided by such section for the assessment of such penalty shall not expire before the later of—

        • (A) the date 90 days after the date on which such notice was mailed or delivered in person, or

        • (B) if there is a timely protest of the proposed assessment, the date 30 days after the Secretary makes a final administrative determination with respect to such protest.

    • Exception for jeopardy

      • • This subsection shall not apply if the Secretary finds that the collection of the penalty is in jeopardy. (c)Extension of period of collection where bond is filed

What is TFRP?

As provided by the IRS

• • • To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the TFRP.

    • These taxes are called trust fund taxes because you actually hold the employee’s money in trust until you make a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.

Who Can Be Responsible for the TFRP?

The TFRP may be assessed against any person who:

• • • Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and

    • Willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

• • • 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).

For willfulness to exist, the responsible person:

• • • Must have been, or should have been, aware of the outstanding taxes and

    • Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

  • Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

  • You may be asked to complete an interview in order to determine the full scope of your duties and responsibilities. Responsibility is based on whether an individual exercised independent judgment with respect to the financial affairs of the business. An employee is not a responsible person if the employee’s function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid.

  • Notice 784, Could You be Personally Liable for Certain Unpaid Federal Taxes? PDF (PDF), contains additional information regarding the TFRP including the basis for the penalty and information about TFRP for employers who outsource some or all payroll duties to third-party payroll service providers (PSP).

  • Figuring the TFRP Amount

The amount of the penalty is equal to the unpaid balance of the trust fund tax. The penalty is computed based on:

• • • The unpaid income taxes withheld, plus

    • The employee’s portion of the withheld FICA taxes.

For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.

Assessing the TFRP

• • • If we determine that you are a responsible person, we will provide you a letter stating that we plan to assess the TFRP against you. You have 60 days (75 days if this letter is addressed to you outside the United States) from the date of this letter to appeal our proposal. The letter will explain your appeal rights. Refer to Publication 5, Your Appeal Rights and How to Prepare a Protest if You Don’t Agree PDF (PDF), for a clear outline of the appeals process. If you do not respond to our letter, we will assess the penalty against you and send you a Notice and Demand for Payment.

Caution

• • • Once we assert the penalty, we can take collection action against your personal assets. For instance, we can file a federal tax lien or take levy or seizure action.

Avoiding the TFRP

• • • You can avoid the TFRP by making sure that all employment taxes are collected, accounted for, and paid to the IRS when required. Make your tax deposits and payments on time. Additional information on employment taxes can be found in Publication 15, Employer’s Tax Guide, and Form 941, Employer’s Quarterly Federal Tax Return PDF (PDF).

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