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 (Federal Insurance Contributions Act) taxes, which are held in trust until the employer makes a federal deposit of these amounts. The IRS applies a term, “Trust Fund Recovery Penalty” or TFRP, well-known by employers, to describe the fine for employer’s willful failure to pay over these taxes. Persons responsible for making such payments may be subject to criminal charges for any willful failure to do so. Most TFRP cases involve corporate officers.
I.R.C. §6672(a) provides that:
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.
Thus, under the above general rule, any person required to collect, truthfully account for, and pay over any tax imposed by the code who willfully fails to do so, will, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax not collected and paid over. This latter penalty may be a harsh financial imposition on the offender.
Two tests must be applied For the IRS to assess a TFRP. The first test determines the responsible person and the second test determines whether this person, if deemed responsible under the first test, willfully failed to make the payment. I.R.C. §6672 allows the IRS to pierce the corporate veil and proceed against any person who is responsible for the corporation’s failure to deposit payroll or trust fund taxes. Also, a failure to pay payroll taxes is willful if it is a voluntary, conscious, and intentional, as opposed to an accidental, i.e., negligent act. To be willful, an individual must either know of or recklessly disregard the due payment of the taxes. Any determination of liability must take into account all facts and circumstances.
The term “person” in §6672 includes:
- Officer or employee of a corporation;
- Partner or employee of a partnership;
- Member or employee of an LLC;
- Corporate director or shareholder;
- Another corporation; and
- Surety or lender.
- Payroll Service Provider (PSP)
- Responsible parties within a PSP
- Professional Employer Organization (PEO)
- Responsible parties within a PEO
- Responsible parties within the common law employer (client of PSP/PEO)
Note that this list is not exhaustive.
The TFRP is not needed to assert liability against the owner of a sole proprietorship because the individual owner is personally liable for employment taxes under IRC §§ 3101, 3402, and 3403. However, the TFRP may be utilized to assert liability against some non-owner that exercises control over the company’s financial apparatus.
Regardless of a person’s corporate title, a person will not be held liable for the TFRP unless he or she has the duty to account for, collect, and pay over the trust fund taxes to the government. Even an officer of the business will not be a responsible person if he or she is an officer in title only and has no substantive duties with the business. O’Connor v. United States, 956 F.2d 48 (4th Cir. 1992). Conversely, anyone without a corporate title that has control of the financial affairs of the business may be held responsible for the TFRP.
The failure to pay payroll/trust fund taxes brings with it the possibility of criminal charges. Pursuant to I.R.C. §7202, a willful failure to pay over or collect tax is a felony punishable by up to a $10,000 fine or five years in prison, or both. In a typical criminal prosecution for failure to pay, the responsible person is usually sentenced to some time in prison and required to pay restitution.
Any person deemed a responsible person under I.R.C. §6672 may be criminally liable under I.R.C. §7202. If you are a “responsible person,” make sure that you understand all of your legal duties and obligation under the Internal Revenue Code. The consequences otherwise may be severe and even result in jail time.
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.
