One complicated branch of tax law involves withholding taxes. These are tax liabilities that are paid by a business entity on assets held in a trust fund. Because of this, they’re most commonly called trust fund taxes. You might also hear them referred to as 941 liabilities, which is a reference to the IRS form they relate to.
If a business fails to pay these taxes, the IRS can be aggressive in their collection processes. They will go after any individuals that are responsible for the business, whether they were part of the situation or not. In most cases, the people billed will have a direct hand in the financial state of the company. But that isn’t always the case.
Corporations often enjoy a certain level of immunity from intense scrutiny and criminal proceedings. A corporation can be convicted of a crime without being fully shut down or needing to do more than pay a fine. But the IRS has authorization to ignore corporate entity protections. They do heavy-duty research to break down corporate finances into a picture of the responsible individuals.
The Trust Fund Recovery Penalty, often referred to as the TFRP, is the assessment that the IRS does when a corporation fails to pay withholding taxes. Rather than slapping the company itself with a fine, the agency looks for the specific people who made the decision to ignore the company’s tax liabilities.
The most common reasons that the IRS will assess a person’s TFRP are:
Sometimes innocent people are caught in the crossfire during these proceedings. If you think you might be the target of a TFRP assessment, you should talk to a lawyer right away. Being given a TFRP might be extremely costly. In some cases, the penalty can be 100 percent of your current assets and holdings, or 100 percent of the company’s owed taxes.
A business tax attorney is specifically educated in corporate tax laws. They have experience with negotiating with the IRS, litigating settlements, and guiding clients through the investigation process. Perhaps most importantly, they can make sure that you have your rights protected while the IRS is compiling evidence. You shouldn’t ever talk to a tax agent without speaking to your lawyer first.
When it comes to small businesses and businesses with a close corporate structure, the IRS doesn’t have to struggle to find the responsible parties. They will simply go after the owner of the business, the principle officers that influenced the financial decisions, and any other high-ranking employees who they reasonably believe were part of the issue.
However, there are also cases where the IRS agents will use a very broad definition of “responsibility” to extract payments from people. You might have a legitimate defense against the accusation. For example, maybe you were responsible for some parts of the company’s tax payments, but withholding taxes were never part of your job.
The most egregious cases happen when the IRS uses the TFRP assessment not only against the higher-ups in a corporation, but also against every single person who handled any type of accounting paperwork whatsoever. That can extend to every employee given the authority to sign checks on behalf of the company, even if they’ve never actually looked at the company finances.
These are some people who might be made responsible for payments through a TFRP, even though they have a defense against wrongdoing:
If you are given a TFRP assessment, you can run into serious problems. That’s especially true for people who have relatively low-paying positions and didn’t know about the financial problems with the company.
You will likely be told to pay a large amount. You also can’t discharge the penalty in bankruptcy proceedings the same way you can with other tax penalties. Your credit rating might take a dive, your home and car might be repossessed, and there may be additional strain on your family.
That’s why it’s so important to contact a lawyer the second that you suspect you might be subject to this assessment. Even if you don’t have confirmation of it yet, talking to a lawyer is the best way to take preemptive action. Your attorney can do damage control to help mitigate the situation.
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