Trust Fund Recovery

Trust Fund Recovery Penalty

(TFRP or 100% Penalty) – I.R.C. 6672

The trust fund recovery penalty (“TFRP”) is prescribed by IRC § 6672, as section that is used to facilitate the collection of tax and enhance voluntary compliance. It serves as an alternative means of collecting unpaid trust fund taxes when taxes are not fully collectible from the company or business that failed to pay the taxes. Congress enacted IRC § 6672 to encourage prompt payment of withheld and other collected taxes and to ensure the ultimate collection of the taxes from a secondary source. Historically, it is also referred to as the 100% Penalty because the person responsible is liable for 100% of the trust fund withheld amount.

Below is a discussion of the elements developed by both the IRS and courts relating to the factors to consider when determining whether a taxpayer is liable for the TFRP. In a number of instances, the client merely worked in an office and had no authority or responsibility to pay these taxes even though the client may have signed checks.  Since each client is unique, we have set out the IRM sections that the IRS Collection and Appeals Officers use in determining liability.

  1. The TFRP is imposed on any person required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities. The TFRP may be imposed for:
    1. Willfull failure to collect tax,
    2. Willful failure to account for and pay tax, or
    3. Willful attempt in any manner to evade or defeat tax or the payment thereof.
  2. The TFRP is equal to the total amount of tax evaded, not collected, or not accounted for and paid over.
  3. The TFRP is generally excepted from discharge in bankruptcy because it is entitled to priority status. See 11 U.S.C. 523(a)(1). However, the exceptions to discharge do not apply to Chapter 13 cases filed before October 17, 2005.
  4. In Chapter 13 cases filed before October 17, 2005, TFRP is dischargeable if it is provided for in the Chapter 13 plan and the debtor successfully completed the plan. For Chapter 13 cases filed on or after October 17, 2005, trust fund recovery penalties are excepted from discharge whether or not they are provided for in the plan or included on a timely proof of claim. See 11 U.S.C. 1329(a) and 523(a)(1). I.R.M (02-08-2011).
  5. The penalty is equal to the total amount of tax evaded, not collected, or not accounted for and paid over. Assessments of the TFRP are possible based on liabilities for the following tax forms. Generally, the one that clients will be involved with is only the first one. The other forms are:
    1. 941, Employer’s QUARTERLY Federal Tax Return
    2. 720, Quarterly Federal Excise Tax Return (see IRM
    3. CT-1, Employer’s Annual Railroad Retirement and Unemployment Return
    4. 943, Employer’s Annual Federal Tax Return for Agricultural Employees
    5. 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
    6. 945, Annual Return of Withheld Federal Income Tax
    7. 944, Employer’s ANNUAL Federal Tax Return
    8. 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests
    9. 8804, Annual Return for Partnership Withholding Tax (Section 1446)
  6. TFRP assessments are assessed and designated on the Transcript as “55.”
  7. The TFRP may be imposed, with respect to the taxes described in the third item listed above for:
    1. Willful failure to collect tax
    2. Willful failure to account for and pay over tax
    3. Willful attempt in any manner to evade or defeat tax or the payment thereof
  8. A revenue officer is initially responsible for determining liability.
  9. It is the policy of the IRS that the full unpaid trust fund amount will be collected only once, whether it is collected from the employer/collecting agent, from one or more of its responsible persons, or from a combination of the employer/collecting agent and one or more of its responsible persons.

A “responsible person” is one who has the duty to perform or the power to direct the act of collecting, accounting for, or paying over trust fund taxes. When evaluating responsibility, consider the Supreme Court’s decision in Slodov v. United States, 436 U.S. 238, 78-1, USTC 9447 (1978). Most trust fund recovery penalty cases involve officers of corporations.

However, a responsible person may be one or more of the following:

  • an officer or employee of a corporation
  • a member or employee of a partnership
  • a corporate director or shareholder
  • a related controlling corporation
  • a lender, a surety, or any other person with sufficient control over funds to direct disbursement of the funds, or
  • in some cases, a person assuming control after accrual of the liability.

In each situation, determine who had a duty to ensure that taxes were withheld, collected, or paid over to the government at the specific time the failure occurred. There can be more than one responsible person. See: (10-19-2007) Willfulness.

The TFRP is a civil penalty, so the degree of willfulness in failing to collect or pay over any tax leading to liability is not as great as that necessary for criminal proceedings. “Willful” is defined as intentional, deliberate, voluntary, and knowing, as distinguished from accidental. “Willfulness” is the attitude of a responsible person who with free will or choice either intentionally disregards the law or is plainly indifferent to its requirements. The taxpayer must establish that he is not willful. This is accomplished by gathering the facts as to what the taxpayer’s duties and responsibilities were during his or her employment.

Relevant inquiries are:

  1. Did the person have responsibility and did so willfully to withhold funds as tax and use those funds to pay operating expenses of the business are willful.
  2. Were the person’s explicit or implicit directions willful to a degree sufficient to make the person liable for the trust fund recovery penalty. The Government does not need to show that a responsible person had any evil intent or desire to defraud the Government of the withheld taxes. The Appeals Officer has responsibility to thoroughly investigate the matter. This is the client’s opportunity to present his or her case in detail. I.R.M. (10-19-2007)
  3. Is the person responsible and if so was the person willful in failing to collect and pay over the trust fund amount. IRM (11-12-2010)

To show willfulness, the government generally must demonstrate that a responsible person was aware, or should have been aware, of the outstanding taxes and either intentionally disregarded the law or was plainly indifferent to its requirements. A responsible person’s failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the TFRP “willfulness” element. See IRM, Willfulness, and exhibit 5.7.3-1, Trust Fund Recovery Penalty (TFRP).

It is difficult to establish “willfulness” in the types of assessments shown below:

If… Then…
The assessment is a Combined Annual Wage Reporting (CAWR) assessment It is normally difficult to establish willfulness to the degree necessary to assert the TFRP (see exhibit 5.7.3-1 for situations where the TFRP should be pursued).
An employment tax assessment is made under IRC 3509 It requires a determination of intentional disregard of the requirements to deduct and withhold taxes (see exhibit 5.7.3-1).
The assessment involves a volunteer director or trustee of a tax exempt organization The Service may need to show the person’s “actual knowledge ” of the organization’s failure to collect or pay over trust fund taxes, if the person was serving as a volunteer solely in an honorary capacity (IRC 6672(e)). (11-12-2010)

In the majority of cases, most of the evidence that supports the TFRP will be either business records or bank records. The revenue officer is required to maintain in the file copies of bank records used to establish responsibility and willfulness.

Business records that can be reviewed include:

  • Articles of Incorporation; Partnership Agreement; or other documents establishing/forming the business entity
  • Minute Books
  • Forms 941, Employer’s Quarterly Federal Tax Return; 1120, U.S. Corporate Income Tax Return; 1065 , U.S. Return of Partnership Income; or, 1040, U.S. Individual Income Tax Return (for disregarded LLCs)
  • For cases where the employment tax returns were submitted in an electronic format (E-file or TeleFile), the signature information is not available on the printed document since the forms are signed via an IRS issued PIN. Use Form 4844, Request for Terminal Action, to request the specific items below from the appropriate Submission Processing Center. For TeleFile returns, request the “signature document” from the Cincinnati Submission Processing Center (CSPC). For E-File returns, request a “copy of Form 8633” , or if the authorized signer is a Reporting Agent, request a “copy of Form 8655″ from the Andover Submission Processing Center (ANSPC). For On-line returns request a copy of the ” PIN signature receipt” from CSPC.
  • Payroll records
  • Any other records that may be relevant to determining the roles and responsibilities of individuals involved with the business entity.

Business records will be reviewed to determine:

  • Duties (and changes to duties) of officers, directors, etc.
  • Appointments and resignations of officers, directors, etc.
  • Responsibilities of individuals to file and pay tax returns
  • Issuance of stock to officers, directors, etc.
  • Assets transferred to officers, directors, etc.
  • Loans made to officers, directors, etc.
  • Unreported payroll and other taxes
  • Diversion of funds
  • Borrowing of funds not used to pay taxes

Bank records that can be reviewed include:

  • Cancelled checks and bank statements
  • Signature cards and correspondence to the bank relative to changes affecting the signature cards
  • Loan applications and records of loans
  • Any other records that may be relevant to determining which individuals were involved in the financial affairs of the business

The bank records will be reviewed to determine:

  • Authority of persons to sign checks and deposit funds
  • Authority of persons to obligate the business by borrowing
  • Diversion of funds to officers, members, etc.
  • Deposits and withdrawals of alleged loans to business by officers, members, directors, etc.
  • Excessive salaries, expenses, etc.
  • Payment of other obligations
  • Deposit records for monies received for sale of assets
  • Deposit records of payments for stock, membership, or other ownership rights in the business
  • Any other relevant records

Establishing Responsibility Responsibility is a matter of status, duty, and authority. A determination of responsibility is dependent on the facts and circumstances of each case.

Potential responsible persons include:

  • Officer or employee of a corporation
  • Partner or employee of a partnership
  • Corporate director or shareholder
  • Another corporation
  • Employee of a sole proprietorship
  • Limited liability company (LLC) member, manager or employee
  • Surety lender
  • Other person or entity outside the delinquent business organization

A responsible person has:

  • Duty to perform
  • Power to direct the act of collecting trust fund taxes
  • Accountability for and authority to pay trust fund taxes
  • Authority to determine which creditors will or will not be paid

To determine whether a person has the status, duty and authority to ensure that the trust fund taxes are paid, consider the duties of the officers as set forth in the corporate by-laws as well as the ability of the individual(s) to sign checks.

In addition, determine the identity of the individuals who:

  • Are officers, directors, or shareholders of the corporation
  • Hire and fire employees
  • Exercise authority to determine which creditors to pay
  • Sign and file the excise tax or employment tax returns, such as Form 941, Employer’s Quarterly Federal Tax Return
  • Control payroll/disbursements
  • Control the corporation’s voting stock

The indicators of responsibility include the following however merely having the indicator does not make the individual responsible for withholding.

  1. The full scope of authority and responsibility is contingent upon whether the person had the ability to exercise independent judgment with respect to the financial affairs of the business.
  2. If a person is an officer or owns stock in the corporation, this cannot be the sole basis for a responsibility determination.
  3. If a person has the authority to sign checks, the exercise of that authority does not, in and of itself, establish responsibility. Signatory authority may be merely a convenience.
  4. Persons with ultimate authority over financial affairs may generally not avoid responsibility by delegating that authority to someone else. If a potentially responsible person asserts that the duty to pay taxes or otherwise handle the financial affairs of the business was delegated to an employee:
    1. Evaluate the facts and circumstances of the case
    2. Determine whether the delegation rendered the person (delegator) powerless to disburse funds or dictate fiscal policy. Delegation may be relevant when determining willfulness.
  5. Persons serving as volunteers solely in an honorary capacity as directors and trustees of tax exempt organizations will generally not be considered responsible persons unless they participated in the day-to-day or financial operations of the organization and they had actual knowledge of the failure to withhold or pay over the trust fund taxes. This does not apply if it would result in there being no person responsible for the TFRP. Refer to IRC § 6672(e). I.R.M. (04-13-2006)

Policy Statement P-5–14 (IRM states that individuals performing ministerial acts without exercising independent judgment will not be deemed responsible. In general, non-owner employees who act solely under the dominion and control of others, and who are not in a position to make independent decisions on behalf of the business entity, will not be assessed the TFRP. Non-owner employees are those who do not own any stock, interest, or other entrepreneurial stake in the company that employs them.

  1. Ministerial acts are performed under the supervision of someone else and do not require independent judgment or decision-making ability.
    1. Example
      The bookkeeper of a company is not an owner and is not related to an owner. She has check signing authority and she pays all of the bills that the treasurer gives her. She is not permitted to pay any other bills, and when there are not sufficient funds in the bank account to pay all of the bills, she must ask the treasurer which bills to pay. The bookkeeper is performing a ministerial act and should generally not be held responsible for the TFRP.
  2. A person is “responsible” for purposes of the TFRP if that person has “significant control” over the company’s finances. “Significant control” means more than having the mere mechanical duty of signing checks or preparing tax returns or having a title that appears to have authority. However, a responsible person need not have the final word in the company regarding the payment of creditors. Officers and higher level employees of a company who are non-owners may still be required to sacrifice their jobs (i.e., quit) to avoid being responsible for the TFRP, rather than obey the orders of an owner to pay other creditors but not to pay current federal trust fund taxes as they become due. See Brounstein v. United States, 979 F.2d 952, 956 (3rd Cir. 1992).
  3. A non-owner employee is generally not a “responsible person ” if the employee’s function was solely to pay the bills as directed by a superior, rather than to determine which creditors would or would not be paid. However, if a non-owner employee, such as an officer, has significant control over making the company’s other financial decisions about who to pay or has the ability to obtain financing for the company, then such an employee cannot avoid being responsible for the TFRP by merely showing that an owner or a lender limited his discretion on the specific matter of paying taxes that the company owed.
    1. Example
      A non-owner employee works as a clerical secretary in the office. She signs checks and tax returns at the direction of and for the convenience of the owner or a supervisor who is a non-owner. She is directed to pay other vendors, even though payroll taxes are unpaid. The secretary is not a responsible person for the TFRP because she works under the dominion and control of the owner or of a supervisor who is a non-owner and she is not permitted to exercise independent judgment.
    2. Example
      The long-time controller of a company was never a shareholder, director, or officer of the company, but he was responsible for overseeing the finances of the company, including the preparation of the payroll and filing the company’s federal employment tax returns. He had the authority to sign checks in any amount and he dealt with the company’s lender on a regular basis when the company experienced financial troubles, though he did not arrange or sign the lending agreement on the company’s behalf. When the lender directed the company to pursue an orderly liquidation of its assets, the controller requested funds from the lender to make full payroll and pay the taxes due on the remaining employees, but the lender forwarded only enough funds for the company to make net payrolls. The controller made out net payroll checks to the remaining employees and paid none of the taxes due, rather than prorate the funds available to the company between payroll and taxes. The controller could be a responsible person for the TFRP. See Hochstein v. United States, 900 F.2d 543 (2nd Cir. 1990).
    3. Example
      An experienced businessman was never a shareholder, director, or officer of a new company, but he served as the general manager of the new company during a seven month period. As general manager, he signed most of the company’s checks to creditors, as well as signing net payroll checks to employees, and there was no monetary limit placed on his check signing authority. He told the bookkeeper which bills to pay. When the company was experiencing cash flow problems, he spoke to one of the owners about the company’s delinquent payroll taxes. The owner told the general manager that these unpaid taxes were none of the general manager’s business and he should not worry about paying the company’s net payroll and missing its tax payments. Both the general manager and the owner believed that the general manager could not be held liable for the TFRP because he was not an owner or officer of the company; the general manager turned down an offer to become the company’s president specifically because he was worried about the company’s tax situation. The general manager could be a responsible person for the TFRP. See Gephardt v. United States , 818 F.2d 469 (6th Cir. 1987). I.R.M. (11-12-2010)

Below is a brief discussion of the responsibilities of the Revenue Officer and Appeals Officer under IRM (2-8-2011) and (10-19-2007).

The Collection function has sole responsibility for recommending assertion of the trust fund recovery penalty. Examination function personnel may refer potential trust fund recovery penalty cases to Collection for investigation. For additional information, see IRM 5.7, Trust Fund Compliance. Before a Trust Fund Recovery Penalty is assessed, taxpayers are mailed or hand delivered a 60-Day Notice of Proposed Assessment, Letter 1153. Letter 1153 advises taxpayers of the proposed penalty and of their appeal rights.

  • If the taxpayer agrees with the proposed penalty, he/she will return a signed Form 2751, Proposed Assessment of the Trust Fund Recovery Penalty.
  • If the taxpayer disagrees, he/she may discuss the proposed penalty with the revenue officer’s group manager or file a written protest.

The taxpayer has 60 days in which to file a timely protest (75 if the letter was addressed outside of the United States). A protest is considered timely if it is mailed on or before the 60th day, (or 75th if outside of the United States) i.e., timely mailed is timely filed. The 60 day period is measured from the mailing date of the Letter 1153, or from the delivery date if Letter 1153 is delivered in person. A timely mailed protest is still timely for purposes of IRC 6672(b)(3)(B) even if the protest is inadequate. Most trust fund recovery penalty cases that are considered by Appeals are pre-assessment. Appeals may receive post assessment trust fund recovery penalty claim cases also.

If the taxpayer timely protests a proposed TFRP, the assessment period will be extended until the date that is 30 days after Appeals makes its final determination with respect to the protest. A protest is timely if it is mailed on or before the 60th day (75th day if the letter was addressed outside the United States) after the mailing or personal delivery of Letter 1153. This gives the taxpayer a full 60 days (75 days if the letter was addressed outside the United States) to respond to Letter 1153. Collection is expected to wait until the 65th day to make any assessment to allow for mail time of a protest.

Appeals is the sole function that may make the “final administrative determination” for purposes of IRC 6672(b)(3)(B). To ensure that the statute is protected on these cases, Appeals will not release jurisdiction before the case is resolved, e.g. Appeals will not release jurisdiction on premature referrals. If Appeals needs to retain jurisdiction, prepare an Appeals Referral Investigation (ARI), for further development or some other reason. Collection should take the necessary action in 45 days. This 45 day period can be extended through mutual agreement of both functions.

After filing a timely protest with Collection, a taxpayer will have 30 days, or any longer period if Collection agrees, to perfect any defects in the protest. After the end of 30 days (or any longer period agreed to), the taxpayer’s case is to be sent to Appeals even if it is imperfect. Appeals will give the taxpayer an opportunity to provide any missing information. This is to ensure that any taxpayer who wishes to appeal will have the opportunity to do so.

IRC 6103(e)(9) provides for disclosure of information where more than one person is held liable for the trust fund recovery penalty. Once a person is determined to be liable then, upon their written request, the Service may disclose, in writing, the name of any other person determined to be liable, whether the Service has attempted to collect the penalty from the other liable person, the general nature of the collection activities and the amount collected. A person is determined to be liable for purposes of IRC 6103(e)(9) when that person is assessed. Therefore, no disclosure is permitted until after the person is assessed.

Following the above points and check lists will assist the student attorney in determining whether the client is responsible and willful and thus liable for the tax.


Trust Fund Memo Sample
Trust Fund Memo Cover Letter