What is the TFRP trust fund recovery penalty?

The trust fund recovery penalty (TFRP) is a 100% penalty on an employer’s failure to pay its trust fund taxes. The TFRP can be assessed against any person in the employer’s business who is (1) responsible for collecting, accounting for, and paying withheld employment taxes, and (2) who willfully fails to collect or pay these taxes.

A director, officer, shareholder or employee of a corporation, a member or employee of a partnership, or any other person with the authority and control over these taxes can be held liable as a responsible person under the TFRP.

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In determining whether a responsible person has significant control over the financial affairs of a business to be held liable for failure to pay trust fund taxes, the Second Circuit has adopted a seven part test to determine a responsible person is one who:

• is an officer or director,
• owns shares or some other stake in the business,
• actively manages the day-to-day business,
• has the ability to hire and terminate employees,
• makes decisions regarding which, when and in what order debts and taxes are paid,
• has control over bank accounts and disbursement records, and
• can sign checks on behalf of the business.

This test was adopted by the First Circuit, which emphasized bullet points 5-7 and stated that the 5th bullet point of the test was the most important.

A responsible person with significant control need not exercise the control, have greater control, or have knowledge of the unpaid taxes to be held liable.

A person’s willfulness in the failure to pay or collect the trust fund taxes can be proven by showing a reckless disregard of the risk the taxes may not be paid or collected. Reckless disregard has been found in cases where a president of a business failed to review quarterly returns that showed balances due and no deposits (Keller v. US), or where a president made payment to creditors other than the IRS with the knowledge that the taxes were due (Shultz v. US).

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Please call us at 1-877-788-2937 or email us to schedule an appointment.

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About Mike Habib, EA NTPI Fellow®:

Mike Habib, EA is an IRS licensed Enrolled Agent who owns and operates a specialized tax services boutique firm serving clients in various metro areas such as Los Angeles, Whittier, Pasadena, Glendale, Burbank, Orange County, Riverside, Palm Springs, San Bernardino, Palmdale, Bakersfield, New York, New Jersey, Chicago, Houston, Phoenix, Philadelphia, San Antonio, San Diego, Dallas, San Jose, Detroit, Jacksonville, Indianapolis, San Francisco, Columbus, Austin, Memphis, Fort Worth, Baltimore, Charlotte, El Paso, Boston, Seattle, Washington DC, Milwaukee, Denver, Louisville, Jefferson, Las Vegas, Reno, Hempstead, Tucson, Nashville, Davidson, Portland, Tucson, Albuquerque, Santa Fe, Anchorage, Atlanta, Long Beach, Fresno, Sacramento, Mesa, Kansas City, Cleveland, Virginia Beach, Omaha, Miami, Oakland, Tulsa, Honolulu, Minneapolis, Pittsburgh, Colorado Springs, Arlington, Wichita, Birmingham, Montgomery

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