How the IRS determines who responsible people are (Trust fund penalty)
Federal taxes may seem burdensome to many employers, but prompt payment of those taxes is often preferable given the penalties associated with a failure to pay. One such penalty is the Trust Fund Recovery Penalty (TFRP), which is assessed against any responsible person who willfully fails to collect withheld income, employment, or excise taxes. See Internal Revenue Service, Employment Taxes and the Trust Fund Recovery Penalty (TFRP), available at https://www.irs.gov/irm/part5/irm_05-017-007).
In order to assess this TFRP, the Internal Revenue Service (IRS) must make a determination as to who is a responsible person. This responsible person can be an officer or 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, any person with authority and control over funds to direct their disbursement, and even another corporation or third party payer. Indeed, the IRS casts a wide net in terms of who is potentially at risk, thereby creating an incentive to follow the appropriate withholding procedures with respect to employment taxes. The willfulness requirement is similarly easy for the IRS to satisfy in assessing the TFRP; for willfulness to exist, the responsible person must have been, or should have been aware of the outstanding taxes and either intentionally chose to disregard relevant tax laws or was clearly indifferent to those laws. Id.
Sometimes, persons that are potentially responsible for TFRP purposes will be asked to complete an interview pursuant to a determination as to whether such persons exercised independent judgment regarding the financial affairs of the business. Interviewees should bear in mind that anyone who simply “pays the bills,” for example a bookkeeper, is not a responsible person for TFRP purposes, and thus is not subject to a TFRP penalty. Rather, such a person must have independent control and judgment regarding the payment of taxes in connection with the employees of the business. Even if the responsible party requirement is met, it is possible that the direction or control of another could preclude a TFRP assessment provided the subject of the TFRP can prove that his or her actions were not willful, i.e. that they were forced or directed by another to avoid the payment of taxes.
Persons that might be at risk of being subject to a TFRP should consult with a licensed attorney that possesses tax law experience in order to ensure that appropriate steps are taken to avoid this sort of liability.
Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.