How aggressive is the IRS in enforcing and collecting Trust Fund Recovery Penalties? A case from the U.S. Tax Court case illustrates the aggressive nature of the IRS when using the trust fund recovery penalty (TFRP) to collect trust fund taxes. Business enterprises must be careful to ensure that they do not incur Trust Fund Recovery Penalties for any failure to remit federal payroll and trust fund taxes when due.
Employers are required to withhold federal income and payroll taxes from their employees’ wages for payment of payroll taxes such as federal income taxes and FICA taxes, which are held in trust until the employer makes a federal deposit of these amounts. The term, “Trust Fund Recovery Penalty” or TFRP, well-known by employers, describes the fine for an employer’s willful failure to pay these taxes. Persons responsible for making such payments may be subject to criminal charges for any willful failure to remit them when due.
While most TFRP cases involve corporate officers, Fitzpatrick v. Commissioner, T.C. Memo. 2016-199, involved the wife of a passive investor of the business entity, in this case, a corporation. In Fitzpatrick, the IRS argued that the taxpayer possessed all the recognized elements of a responsible person, which included her exercising substantial financial control over the employer, being a de facto officer because she opened two bank accounts, and having signatory authority over these accounts, consequently signing checks on behalf of the employer.
The U.S. rejected the argument of the IRS finding that the taxpayer’s role was only ministerial. She had no authority to control the financial affairs of the employer or to exercise any significant authority related to the disbursement of funds. She simply had no involvement in the day-to-day affairs of the business. The IRS also found Fitzpatrick:
- was not an officer, director, owner or employee of the employer at any time;
- had no authority to hire and fire employees;
- had no responsibility to oversee or ensure the payment of payroll taxes;
- was not its bookkeeper or accountant;
- did not reconcile the company’s bank statements;
- had no duty to, and did not, oversee the employees; and
- did not collect, compile or remit any payroll information to the payroll service company.
Once it was determined that she was not a responsible person under § 6672, although therefore unnecessary, the Tax Court nonetheless examined whether or not she acted willfully. The Tax Court believed that because she lacked the requisite knowledge that the payroll taxes were unpaid, the willfulness requirement was unsatisfied.
It is clear that the IRS will vigorously pursue the TFRP when trust fund taxes are collected and unpaid. Business owners, directors, officers and other key employees must understand the seriousness of not paying over monies collected from employees’ wages for income, social security, and Medicare taxes. This may result in personal liability for the full amount of the trust fund taxes collected, but also criminal liability, including jail time and fines up to $10,000. If you have are an employer, especially one facing financial difficulty, and have questions or concerns about payroll taxes and/or the trust fund recovery penalty, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704.
