Trust Fund Recovery Penalty

Once is enough as far as collection of the trust fund recovery penalty is concerned Chief Counsel Advice 200838027

The IRS has issued a new Chief Counsel Advice (CCA) on the trust fund recovery penalty. The IRS notes that the CCA may not be used or cited as precedent.

IRC §6672, imposes a penalty on any person who is required to collect, truthfully account for, and pay over withheld income and Social Security taxes who willfully fails to do so. The amount of the penalty is equal to the amount of the tax that was not collected and paid. The penalty is often referred to as the “trust fund recovery penalty” (TFRP). The penalty is imposed on a “responsible person.” A “responsible person” is anyone within a corporation or partnership who has the duty to collect, account for, or pay over the tax. Depending on the facts of the case, a responsible person could be an officer, a director, an accountant, a comptroller, or even a payroll manager.

Facts. In this instance, a corporation failed to pay its employment taxes for a certain period of time. The IRS assessed the trust fund recovery penalty against two responsible persons. The corporation paid off the principal portion of the TFRP, but accrued interest was still outstanding. The corporation subsequently made a voluntary payment on its employment tax liability, and instructed the IRS to apply the payment to the interest portion of the TFRP. However, the corporation also had an outstanding employment tax liability that was unrelated to the TFRP. At issue was whether the IRS had to follow the corporation’s instructions.

Law. Internal Revenue Manual (IRM) §1.2.14.1.3(2) states that the trust fund recovery penalty, including interest and penalties, should only be collected once (either from the business, or from one or more of its responsible persons). IRM §5.17.7.1.9(2) states that the TFRP assessment should be abated after a corporation pays the delinquent tax.

Ruling. The IRS ruled that the corporation was within its rights to request that the payment be applied to the interest portion of the TFRP. In issuing its ruling, the IRS noted that the corporation was making the payment voluntarily. The IRS said that it was unlikely that a court of law would reach a different conclusion since the IRM credits corporate trust fund payments to responsible persons.

The IRS also pointed out that case law supports its conclusion. In Botta. v. Scanlon, CA2, 11 AFTR 2d 908, 2/18/63, the U.S. Court of Appeals for the Second Circuit determined that the trust fund recovery penalty was simply a means to ensure that the tax was paid. In USLIFE Title Ins. Co. v. Harbison, CA5, 57 AFTR 2d 86-1017, 3/14/86, the U.S. Court of Appeals for the Fifth Circuit determined that although nothing in the language of IRC §6672 explicitly prevents the government from collecting and retaining from each responsible person full satisfaction of the TFRP (including interest), IRC §6672 authorizes the government to collect “only the same amount to which it was entitled by way of tax.”

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