The Importance of Preparing a Well-Written Targeted Protest to Avoid Liability for a Trust Fund Recovery Penalty
By Jeffrey M. Glassman on February 3, 2025
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Jeffrey M. Glassman
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The Trust Fund Recovery Penalty (TFRP) is a significant tool used by the Internal Revenue Service (IRS) to collect unpaid trust fund taxes. These taxes include amounts withheld from employees' wages, such as income tax, Social Security, and Medicare taxes, which are held in trust by the employer until they are paid to the government. When these taxes are not paid over from the trust by the employer to the IRS, the IRS can impose the TFRP on individuals deemed responsible for the collection and payment of these taxes. The TFRP is essentially another mechanism for the IRS to collect money that employers were supposed to collect for, and remit to, the government.
Background on the Trust Fund Recovery Penalty
The TFRP is governed by Section 6672 of the Internal Revenue Code. It allows the IRS to hold individuals personally liable for the unpaid trust fund taxes if: (1) they are found to be responsible for collecting, accounting for, and paying these taxes, and (2) they willfully fail to do so. The IRS will sometimes take a broad view regarding who should be considered a “responsible person” (i.e., under the first of the two main clauses under Section 6672) and an expansive view of what behavior is viewed as “willful”.
The IRS typically targets individuals who have significant control over the financial affairs of the business, such as officers, directors, and other key employees.
The process for asserting the TFRP involves several steps. Initially, the IRS, through an IRS revenue officer, will conduct an investigation to determine who is responsible for the unpaid taxes and should be held liable for a trust fund recovery penalty. This can include reviewing company records, bank signature cards, interviewing potentially responsible individuals, and gathering evidence of willfulness. If the IRS determines that an individual is liable, it is generally required to notify the individual of the proposed assessment and provide an opportunity to submit a protest to the IRS Office of Appeals to challenge the determination before the proposed assessment becomes an actual assessment.
The Importance of a Well-Written Targeted Protest
A well-written targeted protest is essential for several reasons. First, it provides an opportunity to present evidence and arguments that can refute the IRS's determination of liability. This can include demonstrating that the individual did not have significant control over the financial affairs of the business or that they did not willfully fail to pay the taxes. A successful protest can prevent the imposition of the TFRP and avoid the severe financial consequences associated with it. If a protest is unsuccessful, the IRS will usually assess the liability, and a taxpayer may need to pay some or all of the liability to challenge the issue in court.
Second, a targeted protest can help ensure that the IRS follows proper procedures in its investigation and assessment. The IRS is required to follow specific guidelines and procedures when asserting the TFRP, and a well-prepared protest can highlight any deviations from these procedures. This can include issues such as improper notification, lack of evidence, or failure to consider relevant information. By identifying these issues, a protest can strengthen the individual's case and increase the likelihood of a favorable outcome.
Third, it allows for an IRS Appeals Officer with no prior involvement in the case to take a fresh look at the case and engage in dialogue with the taxpayer’s representative. Often times, these conversations can resolve misunderstandings and lead to a favorable result. These conversations, however, are usually framed around the content of the taxpayer’s protest, so it is crucial that the protest contain effective arguments.
Conclusion
Trust fund recovery penalties can be financially ruinous to affected individuals. It is of paramount importance that people take the process seriously and rely on trained and well-regarded professionals to navigate the complex web of procedures and considerations.
If you have any questions about trust fund recovery penalties, or any civil or criminal tax issue, you can contact me at jglassman@meadowscollier.com or 214-749-2417.
Background on the Trust Fund Recovery Penalty
The TFRP is governed by Section 6672 of the Internal Revenue Code. It allows the IRS to hold individuals personally liable for the unpaid trust fund taxes if: (1) they are found to be responsible for collecting, accounting for, and paying these taxes, and (2) they willfully fail to do so. The IRS will sometimes take a broad view regarding who should be considered a “responsible person” (i.e., under the first of the two main clauses under Section 6672) and an expansive view of what behavior is viewed as “willful”.
The IRS typically targets individuals who have significant control over the financial affairs of the business, such as officers, directors, and other key employees.
The process for asserting the TFRP involves several steps. Initially, the IRS, through an IRS revenue officer, will conduct an investigation to determine who is responsible for the unpaid taxes and should be held liable for a trust fund recovery penalty. This can include reviewing company records, bank signature cards, interviewing potentially responsible individuals, and gathering evidence of willfulness. If the IRS determines that an individual is liable, it is generally required to notify the individual of the proposed assessment and provide an opportunity to submit a protest to the IRS Office of Appeals to challenge the determination before the proposed assessment becomes an actual assessment.
The Importance of a Well-Written Targeted Protest
A well-written targeted protest is essential for several reasons. First, it provides an opportunity to present evidence and arguments that can refute the IRS's determination of liability. This can include demonstrating that the individual did not have significant control over the financial affairs of the business or that they did not willfully fail to pay the taxes. A successful protest can prevent the imposition of the TFRP and avoid the severe financial consequences associated with it. If a protest is unsuccessful, the IRS will usually assess the liability, and a taxpayer may need to pay some or all of the liability to challenge the issue in court.
Second, a targeted protest can help ensure that the IRS follows proper procedures in its investigation and assessment. The IRS is required to follow specific guidelines and procedures when asserting the TFRP, and a well-prepared protest can highlight any deviations from these procedures. This can include issues such as improper notification, lack of evidence, or failure to consider relevant information. By identifying these issues, a protest can strengthen the individual's case and increase the likelihood of a favorable outcome.
Third, it allows for an IRS Appeals Officer with no prior involvement in the case to take a fresh look at the case and engage in dialogue with the taxpayer’s representative. Often times, these conversations can resolve misunderstandings and lead to a favorable result. These conversations, however, are usually framed around the content of the taxpayer’s protest, so it is crucial that the protest contain effective arguments.
Conclusion
Trust fund recovery penalties can be financially ruinous to affected individuals. It is of paramount importance that people take the process seriously and rely on trained and well-regarded professionals to navigate the complex web of procedures and considerations.
If you have any questions about trust fund recovery penalties, or any civil or criminal tax issue, you can contact me at jglassman@meadowscollier.com or 214-749-2417.
