Month: August 2023

If the IRS has assessed a “Trust Fund Recovery Penalty” (TFRP) against you, you must take this very seriously.

As money withheld from employee paychecks, the IRS is very protective of this “Other People’s Money”. If this “other peoples money” is not properly deposited with the IRS, The TFRP will be assessed on those responsible for withholding and remitting payroll taxes to the government.

This penalty can be assessed on your own business, or, if you are an employee (not an owner of the business) and the withheld taxes have not turned over to the IRS, the could call you a “Responsible Person” and ask you to pay.

Wait!  That can’t be right, can it?  If you work for someone and part of your job duties were to prepare payroll, and your boss instructed you to NOT make the required payroll tax deposits, the IRS can hold you responsible???

Yep.  That’s what I’m saying.  Fair or not, the IRS calls this a “responsible person” penalty.  The IRS will always try and collect their money.

I. What’s a Trust Fund Recovery Penalty (TFRP) and Can an Offer in Compromise Help?

A. What’s a Trust Fund Recovery Penalty

Part of preparing payroll includes calculating the taxes to be withheld on each paycheck.  The company then adds their portion to this number and that would constitute that pay periods payroll tax deposit.

Most businesses will pay the payroll taxes withheld within a few days of payroll. If you owe less than $1,000 for a specific quarter, these taxes are paid when you file the quarterly payroll returns.

Payroll taxes are considered “Other People’s Money” (remember, you calculated the taxes to be withheld from your employee’s paychecks) so the IRS treats these payments a little differently than your income taxes.

That’s where the “Trust Fund Recovery Penalty” comes into play.  A responsible person can be the business owner(s) or the person tasked with preparing payroll and remitting taxes.

You CAN be a responsible person even if you don’t own any part of the business, or have signature authority on the bank accounts.

B. What’s an Offer in Compromise?

An Offer in Compromise is an IRS program designed to assist people with large tax debts (such as a trust fund recovery penalty) who won’t be able to pay without it horribly affecting their lives.

I don’t want to suggest that this is an easy way to get out of paying your taxes.  Ads claiming to get you out from under your big tax debt for “pennies on the dollar” are misleading.

The IRS is patient and will wait for you to pay. They have 10 years to collect. An Offer in Compromise may get you out of tax trouble, but you must qualify and the qualification bar is high.

There is also the cost of having someone prepare your application.  You can try yourself, but your chances of being approved are pretty low.  The OIC acceptance rate is usually around 33% overall (per the IRS in 2019).  You will see studies out there claiming anything from 5% to over 40%. 

C. Can an OIC help with my TFRP?

Short answer, yes.  But you have to qualify and the calculated amount must be less than the tax plus cost to prepare the application.

Let’s find out how to qualify.

II. Why The IRS Needs the Trust Fund Recovery Penalty (TFRP)?

A. Definition and Purpose of TFRP

The Trust Fund Recovery Penalty is put in place to ensure the government has enough money to operate.

Payroll tax deposits made by US businesses is the cash flow our government uses on everything it does.

When someone doesn’t remit the taxes withheld on peoples’ paychecks, there is less cash available to pay for things like our military, social security payments and money paid to states for things like education and Medicare.

How would your life be impacted if your employer stopped paying you, but still insisted that you kept working?  The TFRP allows the IRS to go after those who had responsibility to remit these withheld taxes.

B. How Does the IRS Know Who to Assess the Penalty Against?

The IRS can assess the TFRP against the business owner, an officer, a partner or an employee.  An owner, partner or officer can be held liable statutorily since they are already liable for other actions taken by the business.

The touchy one is when they go after an employee.  If you prepared the payroll and generally remit tax deposits, the IRS can hold you liable.

If you are/were an employee, the first thing we would do is collect evidence to support the fact that you DID NOT have any control or responsibility.  Easier said than done, but the first step.

III. Can An OIC Solve Your TFRP Problems?

A. The First Step Is to Do a Preliminary OIC Calculation

This is a seat-of-the-pants calculation to give you an idea what your offer will be.

Here’s part 1 of the calculation:

1. How much is your monthly income?  If the amount is inconsistent, then come up with an average.
2. What are your monthly expenses?  You’ll need to list these out.
3. Regarding your monthly expenses, the IRS has limits on many expenses based on where you live.
4. After paying your bills, you will know what your disposable income is.
5. This amount is now multiplied by either 12 or 24 depending on how quickly you want to pay the IRS.

The next step is deciding how fast you can remit your offer amount to the IRS. If you use the 24 month amount, you have 24 months (or less) to pay off your liability.

If you use the 12 month amount, you must have your tax bill paid off within 5 months of IRS acceptance.

Part 2 of the calculation is as follows:

1. Take the calculated amount from above.  We’ll pretend that number is $12,000.
2. Make a list of all other assets and their purpose, i.e. business or personal.
3. Exclude assets used for your business.  They must be business assets to exclude.  
4. Figure out the equity in each asset.  That’s the amount you would get if you sold it. 
5. As an example, this number is $25,000.  Add this amount to the first calculated amount.
6. This is your offer to the IRS.  If you owed $250k, the $37k amount looks much better.  If you owed $25k, no bueno.

When attempting an OIC for a TFRP you must understand the “line” for the IRS is much higher. This is money that belongs to your employees, not you.

B. Who can apply?

This is actually pretty straight forward.  You can apply if:

1. No unfiled or missing tax returns.
2. Are not in bankruptcy.
3. If you are the business owner, you must be current through the last 2 quarters with tax payments and employment tax return filing.
4. If you are including the current year, you must be extended if you haven’t filed yet.

C. How To Apply

If you are an employee, you fill out form 656 and submit with the application fee, any tax deposit required and supporting documentation.   Supporting documentation can be anything from bank statements, bills and invoices you paid, and paystubs.

If you are the business owner, you will need to fill out form 433-OIC instead of form 656.  Depending on the amount owed, you may need to prepare forms 433-A and 433-B.

IV. Apply and Hurry Up and Wait

A. Submit your Offer in Compromise Application

Fill out the appropriate application and submit it with all supporting documentation.

If you make a claim on your application that you feel is important, make sure to include documentation to prove your point.

B. Now We Wait………

The IRS will now go over your application with a fine-tooth comb.  They will prepare their own calculations comparing them to your offer.  They can also corroborate your documentation.  The initial look-through will take around 6 months.

After the initial review, the IRS will most likely reach out to you asking for further corroboration.  They will be inquiring as to whether your financial situation has changed.  If your situation remains the same, they’ll look at the file again before making their decision.

C. Yes, No or We Need to Talk

Based on your application the IRS will either accept your offer or reject it.

Many times, however, they will come back to you with a different offer, or allow you to re-open negotiations.  Keep in mind that they WANT to resolve this case.

Once the IRS accepts your offer, you are required to keep up with your tax filigs, payments and estimate payments.  For the next 5 years, you cannot file or pay late.  You must pay your estimates if required.  You must be a model taxpayer.  Don’t give them an excuse to rescind the agreement, making the entire balance, plus penalty and interest fully due.

VI. What Alternatives Are Available?

A. Installment Agreements

This option allows you to pay the liability off over a period of time.  You have up to 72 months (6 years) to pay the debt.  There is also a possibility of a partial pay Installment Agreement.  If your finances won’t allow for full payment, then there is a possibility of making payments for 72 months and not fully paying the debt. Due to the size of most TFRP’s, a partial pay installment agreement might be the best course of action.

B. Currently Not Collectible (CNC)

This is a temporary fix.  Currently Not Collectible status is a pause in collection activity. This is for taxpayers who are in a temporary bind and only need time to sort things out.  If granted, the IRS will leave you alone, usually for 12 months.

This can be used to buy additional time to figure out your options.

C. Challenge the Trust Fund Recovery Penalty Assessment

THis is the first thing to look at.  The IRS will cast as wide a net as possible to collect their money.  There are two things the IRS looks at:

1. The duty to perform the collection, accounting for and payment of trust fund taxes (what payroll withholdings are considered).
2. The power to direct these actions.

The Chief Financial Officer of the company would qualify as a responsible person.  A data entry clerk simply doing what the boss says would not be a responsible person.  Many times, this must be proven to the IRS.

IX. Conclusion to Using an OIC on your TFRP

Finding yourself in this situation can be paralyzing.  Typically, the dollar amount is big.  Huge sometimes.  If there are a lot of employees, the required deposit will be large.  2-3 full-time employees paid twice a month can conservatively amount to $10k per month.  One quarter will then be $30,000 PLUS PENALTY AND INTEREST!

This all becomes even worse if you were an employee and have no ownership stake.  It makes no logical sense that you, as an employee, can be held liable for your employer’s tax debt but in this case it’s possible.

To qualify to apply you must be current on all tax return filings and not currently going through bankruptcy proceedings.

The IRS looks at three things when deciding whether to review your file:

• Doubt as to Collectability – You don’t/won’t have enough income/assets to full pay.
• Doubt as to Liability – The IRS made a mistake in assessing the tax.
• Effective Tax Administration – This is subjective.  Think ‘Do the right thing” as it relates to the IRS.  I use this for elderly clients who will never be able to pay.  Effective tax administration isn’t as readily accepted as the other two options.

For the IRS to accept your offer, you must demonstrate:

• An inability to fully pay your debt.
• The hardship you would experience if you paid the debt in full. 
• The amount offered must be more than the “Reasonable Collection Potential” amount calculated by the IRS using the info you submitted.
• You must show the ability to pay the offer amount within the repayment period.

The IRS deals with payroll tax debts differently than income tax debts.  Payroll tax deposits is the cash flow the US Government uses for daily operations.

If you find yourself in this situation you need to contact an expert in the field.  The IRS will do everything in their power to collect.  We need to be ready to defend your actions and responsibility to make this bad dream go away.