Presentation given to SHRM - September 2018

1. IRS TRUST FUND RECOVERY PENALTY
(TFRP)
Ed Cather
Sept. 6, 2018
parsonsbehle.com
SHRM October Conference

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 TFRP is an IRS Penalty assessed to responsible parties
who fail to timely pay employer withheld taxes to the IRS.
What is TFRP?

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 Taxes withheld by an Employer for the IRS, including
– Federal Income Tax
– Social Security
– Medicare
– Certain excise taxes collected by communications and air
transportation companies.
Which Taxes?

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 Liability for the penalty arises from willfully failing to
– Collect
– Account for or
– Pay employer withheld taxes to the IRS.
 Liability also arises for willful attempts to evade or defeat
any employer withheld taxes owed to the IRS.
What Triggers TFRP Liability?

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 “Willfully” means voluntarily, consciously, and
intentionally.
 A responsible person acts “willfully” if this person knows
that the required actions are not taking place for any
reason.
 No evil or bad intent is required.
How is Willfully Defined?

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 The federal courts of appeal are split on whether gross
negligence is sufficient to establish willfulness.
– Sixth Circuit: Gross negligence cannot prove willfulness.
» Byrne v. United States, 857 F.3d 319, 327 (6th Cir. 2017)
– Seventh & Ninth Circuit: Gross negligence can prove willfulness.
» Wright v. United States, 809 F.2d 425, 427 (7th Cir. 1987)
» Phillips v. IRS, 73 F.3d 939, 943 (9th Cir. 1996)
Gross Negligence

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 Although the precise standards vary by jurisdiction,
reckless disregard may also establish willfulness. For
example, Willfulness may include the following:
– “reckless disregard for obvious or known risks”
» Calderone v. United States, 799 F.2d 254, 260 (6th Cir. 1986)
– “failure to investigate or correct mismanagement after being
notified that withholding taxes have not been paid.”
» Morgan v. United States, 937 F.2d 281, 286 (5th Cir. 1991)
Reckless Disregard

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 Some jurisdictions have adopted a defense to willfulness
when the responsible party “reasonably believed that trust-
fund taxes were being paid”
» Byrne v. United States, 857 F.3d 319, 329 (6th Cir. 2017)
» Winter v. United States, 196 F.3d 339, 345 (2d Cir. 1999)
Reasonable Belief Exception

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 Paying other business expenses instead of trust fund
taxes, including the payment of net payroll, is considered
willful behavior.
» IRS Notice 784
Example of willful conduct

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 Responsible persons include anyone “who has the duty to
perform and the power to direct the collecting, accounting,
and paying of trust fund taxes.”
» IRS, Employment Taxes and the Trust Fund Recovery Penalty (TFRP), available
at https://www.irs.gov/businesses/small-businesses-self-
employed/employment-taxes-and-the-trust-fund-recovery-penalty-tfrp
Who Can Be Held Responsible?

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 An officer or an employee of a
corporation,
 A member or employee of a
partnership,
 A corporate director or shareholder,
 A member of a board of trustees of a
nonprofit organization,
 Another person with authority and
control over funds to direct their
disbursement,
IRS Examples of Responsible Persons
 Another corporation or third party
payer,
 Payroll Service Providers (PSP) or
responsible parties within a PSP
 Professional Employer Organizations
(PEO) or responsible parties within a
PEO, or
 Responsible parties within the
common law employer (client of
PSP/PEO).
» IRS, Employment Taxes and the Trust Fund Recovery Penalty (TFRP)

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 TFRP is in addition to any other IRS penalties applicable
to nonpayment of taxes.
 TFRP is assessed in an amount “equal to the total amount
of the tax evaded, or not collected, or not accounted for
and paid” to the IRS.
» 22 U.S.C. § 6672(a)
 Criminal penalties may also be pursued in serious cases.
» See 26 U.S.C. § 7202
What Are the Possible Penalties?

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Questions?
C. Edward Cather III
208.528.5224
ecather@parsonsbehle.com