What is the trust fund recovery penalty?

Learn about the trust fund recovery penalty. See how important having legal representation is if you face TFRP investigation.

When an employee earns a paycheck, money comes out in the form of tax deductions. This money does not go directly to the IRS or state tax agency. The liability is on the employer to ensure the money gets to where it should go. If an employer fails to pay this money out, it may face a trust fund recovery penalty.

A trust fund for employment taxes

When an employer withholds tax money from employees' paychecks, it should put that money into a specific fund. This fund services the sole purpose of holding tax payments. The term "trust fund" comes from the penalty the IRS imposes for not paying the employment taxes per the law.

Trust fund recovery penalty

According to The CPA Journal, the penalty is a way for the IRS to punish employers or other responsible parties for failing to pay required employment taxes. It imposes it on the person who was responsible for withholding and paying the taxes. The law also requires the person to have willingly not paid the taxes. According to the IRS, willingly can mean that the person did it intentionally and knew that he or she was doing something wrong.

The TFRP process

The CPA Journal explains that if the IRS suspects non-payment of taxes, it will send a revenue officer to conduct an investigation. The officer will gather documents and other relevant information. He or she may conduct interviews as well. The officer may issue a summons for documents or interviews if needed.

During the investigation, the officer's goal is to get someone to complete Form 4180. It contains questions that help uncover the responsible party. It can and will become evidence in the case.

Dealing with an investigation

Non-payment of employment taxes can occur in many ways, but it is essential when facing a TFRP investigation that a person understands the requirements to prove guilt. If the IRS officer cannot show that a person had responsibility and willfully did not pay the taxes, then he or she does not have a case.

Most often, the answers on Form 4180 are what lead to the finding of guilt and assessment of the TFRP. It is in the best interests of each individual and of the company for parties to have legal representation whenever attending an interview with a revenue officer. An attorney, such as those at Levins Tax Firm, is best suited to help a person avoid incriminating him or herself when filling out the form.