What is the IRS Trust Fund Recovery Penalty?
The trust fund recovery penalty is one of the IRS’s largest and most serious penalties. If you receive an IRS notice about the trust fund recovery penalty, it’s a serious matter you need to address.
The tax attorneys at The W Tax Group have extensive experience dealing with trust fund recovery penalties, and we can help you deal with the IRS.
What Are Trust Fund Taxes?
Trust fund taxes include employment tax, income tax withheld from your employees, and excise taxes you have collected. These taxes are called trust fund taxes because you collect them from another person, hold them in trust, and send them to the IRS.
Here’s an example. Say you pay your employee $1500. You withhold $93 for Social Security contributions, $21.75 for Medicare premiums, and $150 for income tax. This $264.75 is a trust fund tax.
As an employer, you also have to match the Social Security and Medicare tax you withheld from your employee. But these amounts are not considered trust fund taxes, and they won’t be subject to the trust fund recovery penalty. However, you may still incur penalties and interest for not paying these taxes.
How Much Is the Trust Fund Recovery Penalty?
The trust fund recovery penalty is equal to the unpaid trust fund taxes. To return to the above example, if you don’t pay the $264.75 in trust fund taxes, your penalty will be $264.75. Your total amount due will be $529.50. This is one of the most significant penalties assessed by the IRS.
The IRS doesn’t just go after businesses for this penalty. It goes after anyone who may be responsible, and the agency will seize personal assets to cover the bill.
Who Has to Pay the Trust Fund Recovery Penalty?
The IRS can hold a lot of different people responsible for the trust fund recovery penalty. Essentially, anyone who was responsible for paying the trust fund tax and failed to pay it can be held responsible. That includes the following:
- A corporate officer, director, employee, or shareholder
- A partnership member or employee
- Nonprofit board of trustee members
- Third-party payer
- Responsible parties at a payroll service provider or professional employer organization
To be held responsible, you must have willfully not paid the taxes. For instance, if you handle the finances for a company and you decide to pay your electric bill instead of your trust fund taxes, you are acting willfully. However, if your job is just to write checks as directed by your boss, you are not likely to be responsible.
What to Expect If You Have Unpaid Trust Fund Taxes
If the IRS finds out that a business isn’t paying its trust fund taxes, a revenue officer will start to look for the responsible party. They will request info from the company to figure out who is responsible for paying these taxes. This may include bank statements, canceled checks, information about who has access to online accounts, partnership agreements, and articles of incorporation.
IRS Notifications of Trust Fund Recovery Penalties
Once the agency identifies some potentially responsible parties, it will send out Letter 1153 (Trust Fund Recovery Penalty Proposed). You have 10 days to informally protest the assessment, and you have 60 days from the date on the letter to file an appeal with the IRS Office of Appeals.
The notice will also include Form 2751. If you sign this form, you are admitting responsibility and agreeing to the trust fund recovery penalty. Then, the IRS will send you Letter 1155(DO), Notice of Agreed Trust Fund Recovery Penalty.
Prior to signing this form, you may want to consult with a tax attorney. They can help you respond to the IRS and ensure you get the best outcome possible for your situation.
What Is the Trust Fund Recovery Interview?
The IRS can summon anyone it believes may be responsible for unpaid trust fund taxes to an interview. This is called a 4180 interview because the IRS agent asks questions from Form 4180. The questions help the IRS determine if you were responsible for paying the tax.
You can avoid a 4180 interview by doing one of the following:
- Paying the trust fund taxes and penalty
- Admitting responsibility by signing Form 2751
If you believe that you are not responsible for the trust fund taxes, you may want to consult with a tax professional. They can help you through this process. They can also help if you signed Form 2751 accidentally.
What If You Can’t Afford to Pay the Trust Fund Recovery Penalty?
If you cannot afford to pay the trust fund recovery penalty, you may be able to set up an installment agreement to pay the tax and penalty in monthly payments. If you cannot pay anything, you can apply for currently not collectible (CNC) status. This requires a full financial disclosure, and the IRS will review your situation every two years to see if anything has changed.
Get Help with the Trust Fund Recovery Penalty
Negotiating with the IRS on your own regarding the trust fund recovery penalty is a daunting task. Engaging a tax attorney for help could be a taxpayers best option. The team at The W Tax Group can help you negotiate an arrangement with the IRS. Get help now by contacting us today.