What is Trust Fund Recovery Penalty?
An employer is required by law to withhold payroll tax from employees and then send the withholding money to the IRS. The requirement to send the money to the IRS can be daily, every other day, weekly, bi-weekly, monthly, or even quarterly. At the end of each quarter the employer would file form 941 indicating to the IRS the amount of withholding for the quarter. Some employers would file 944, annual form, that is a topic for next time.
A trust fund recovery penalty is when the employer fails to send the withholding tax to the IRS.
What Happens If An Employer Does Not Send The Money To The IRS?
It may be possible that the employer is unable to send the money to the IRS, because the employer is using the money to pay for other liabilities. The IRS will penalize anyone who made the decision not to pay the tax liability. The IRS can come after the members of the business, managers, secretary, and anyone else who had decision making ability.
The amount of penalty can be equal to the amount of money taken from the employees and not paid to the IRS.
Time Limitation for IRS to pursue TFRP:
IRS will need to assign a Revenue Officer to investigate the case in order to assess the TFRP. If no Revenue Officer is assigned then the IRS may lose the right to assess the penalty.
Statute of Limitations Expiration Date for TFRP
The statute of limitation for the IRS to assess trust fund recovery penalty is three years from the "filing date". This three year mark begins when your company files the employment tax returns, Form 941.
Filing Date- is defined by Internal Revenue Code 6501(b)(2) -
"For purposes of this section, if a return of tax imposed by chapter 3, 4, 21, or 24 for any period ending with or within a calendar year is filed before April 15 of the succeeding calendar year, such return shall be considered filed on April 15 of such calendar year."
So for example- 941 return filed on time for June 30, 2018- the IRS assessment does not begin to consider the return filed for trust fund assessment purposes until April 15, 2019. This allows the IRS to assess trust fund recovery penalty until April 15, 2022. Three years from April 15, 2019.
However, if a 941 return was filed timely for the quarter ending December 31, 2017, the IRS will have three years from April 15, 2018 to assess trust fund recovery penalty against you. The IRS will have until April 15, 2021 to assess trust fund recovery penalty.
If you file your Form 941 late, the statue of limitation for the IRS to assess trust fund recovery penalty is three years from the filing date, but the statute of limitation must have expired if it were filed on time.
There are many nuances to trust fund recovery penalty and I have seen clients where the IRS did not assess anybody and the three year statute of limitation has passed. Most of my clients have received a notice of assessment and this is where a taxpayer should hire a tax attorney in order to mitigate the effect. I have been able to avoid assessment of TFRP for my clients and I have seen cases where all evidence favored the IRS to assess my clients TFRP.
If you have received IRS notices for assessment or have a business with outstanding tax liability, it is important to hire a professional- Reliable Tax Attorney is a Maryland Tax Attorney representing clients nationwide before the IRS and various tax agencies. For more information on how our office can assist you with your tax problems, please call 443-345-8291.