Trust Fund Recovery Penalty (or TFRP) resolution is a very important part of any tax problem resolution practice, and it can mean a lot of extra income for any CPA practice offering this service – there’s a LOT of this kind of work out there.
One of the worst tax violations is an employer’s failure to remit payroll taxes it has withheld from its employees’ pay. But despite its severity, failure to pay payroll taxes is one of the most frequent IRS tax problems my firm encounters.
Trust Fund Recovery can be a very lucrative offering, but, by its nature, effective resolution requires a full understanding of all the ramifications of every step along that path to resolution. And it involves two kinds of businesses: ones that can and will survive this situation and manage to put it behind them; and ones that are already on a downward spiral, and Trust Fund crime (or Payroll Tax Liability) – and it is a crime – is just one of many factors in the business’ decline. That’s when I (or you, should you engage in this kind of tax problem resolution) have to have that really difficult conversation with a business owner, advising them that they need to wind-down the business – and, of course, that creates a whole new set of steps and procedures on top of resolving the TFRP matter.
Employee Tax Withholdings are Held in Trust for the Government
The payroll taxes an employer withholds from an employee (the “Trust Fund”) never belong to the employer, but instead are held in a constructive trust for the federal government. As such, every employer is a Trustee whose sole beneficiary is the United States. As a Trustee, the employer has a fiduciary responsibility to properly report and turn over all withheld taxes.
If a business doesn’t pay over their payroll taxes the IRS considers it to be a theft of government funds and may impose civil penalties, criminal fines and other criminal sanctions. Employers who are behind in their payroll tax deposits can count on immediate and aggressive collection action by the IRS. This can result in what is known as the Trust Fund Penalty.
The IRS is empowered to assess a penalty against individuals who are deemed responsible for the failure of the business to remit payroll taxes to the federal government. This penalty is known as the Trust Fund Penalty or 100% Penalty, and it imposes a fine that is equal to 100% of the portion of the payroll taxes that was withheld from employees’ pay and held in trust for the government.
Two Components to Establish TFRP Liability
There are two statutory components that must be established before a person can be held liable for the TFRP. First, the individual must be a “responsible person” for withholding and paying employment taxes to the IRS. Second, the person must have “willfully” failed to collect and remit the employment taxes due.
A “responsible person” can include any officer or employee of a corporation, or member or employee of a partnership, who has the duty to collect or pay employment taxes – basically anyone in the company who handles/precesses money, does the hiring, firing and related activities, as well as anyone who signs checks, like a bookkeeper.
“Willfulness” is defined as a “voluntary, intentional, and conscious decision” to pay other creditors rather than remit the trust fund taxes to the government. Note that mere negligence is never a sufficient basis for liability. Both statutory components must be established before the TFRP can be implemented.
It’s hard for an owner of a small business to avoid responsibility since they tend to wear many hats and make all the business decisions. A small business owner who handles the money, pays the bills and makes the decisions where and how the money is spent, will likely fill both requirements and be held liable (along with anyone deemed to be complicit in the knowledge of withholding the payroll taxes).
A lot of resolution business results from situations where a small business has 2 owners, one in the office, one out in the field. This is very common. The one out in the field might say, ‘I didn’t know anything about it.’ You would think that a 50% business owner would know about the other partner, but this situation is the source of many cases for resolution.
Resolution for In-Business Taxpayers
The IRS is concerned that a delinquent payroll tax employer who is still in business will continue to use the Trust Fund for its own purposes. The continued failure to remit payroll taxes is called “pyramiding” and if a business continues doing it, the IRS will shut down that business and the responsible parties could wind up in jail.
If a business can show that it has corrected the problem and is now keeping current with its payroll tax deposits and can show that it is profitable enough to allow it to remain current and make payments on the unpaid payroll taxes (plus penalties and interest), the IRS will consider an Installment Payment Plan that will allow you to remain in business. The most important thing is to keep current with the payroll tax deposits and to avoid pyramiding. The old amount may expire via a statue of limitations, or be reduced with an offer in compromise, but it is imperative that a business maintain current payment of payroll taxes. If they cannot prove they can do that, you don’t want to retain them as clients.
Adding Trust Fund Recovery as a Service
There are a lot more subtleties in TFRP resolution, but I’ve covered the basics here. One key thing to keep in mind, as a CPA practice is this: Since your client is in a situation of potentially criminal activity involving the misdirection of funds to the most powerful debt-collector in the world, I can’t stress enough: get your money in advance! Also, in representing the business, if you’re involved in the payment of installments, you must make specific designations or be potentially liable for malpractice. This entire resolution service is very complicated, and while it can be extremely lucrative for you, you must cross all your “t”s and dot all your “i”s.
This is a very lucrative service to offer, but it is complex and requires proper focus to implement properly into your practice. My Tax Problem Solver Team and I are always here to help. So please don’t hesitate to call 813-600-5889 or email me at larry@taxproblemsolver.com
