The Trust Fund Recovery Penalty is based on IRC 6672(a) and facilitates the collection of tax and enhances voluntary compliance. The Trust Fund Recovery Penalty serves as an alternative means of collecting unpaid trust fund taxes when taxes are not fully collectible from the company/business that failed to pay the withheld taxes. Internal Revenue Manual (IRM) 5.17.7, Legal Reference Guide for Revenue Officers, Liability of Third Parties for Unpaid Employment Taxes, provides legal guidance on the use of the Trust Fund Recovery Penalty as defined under IRC 6672. This IRM section also addresses the liability of third parties paying or providing for wages under IRC 3505.

The authorities for the actions discussed in this IRM are found in the following Internal Revenue Code:

The Director Headquarters Collection is the executive responsible for providing policy and guidance for IRS employees and ensuring consistent application of policy, procedures, and tax law to effect tax administration while protecting taxpayer rights.

The Director Collection Policy reports to the Director Headquarters Collection and is responsible for the delivery of policy and guidance that impacts the TFRP program.

The Program Manager, Employment Tax, reports to the Director, Collection Policy and is responsible for providing policy and procedural guidance on specialized processes to IRS employees.

Revenue officers are responsible for making collection determinations including Trust Fund Recovery Penalty recommendations.

Group managers have the authority and responsibility to review and approve Trust Fund Recovery Penalty recommendations.

Field Collection is responsible for ensuring taxpayers are informed of their rights in accordance with the Taxpayer Bill of Rights (TBOR) adopted in June of 2014.

Program Reports: The Automated Trust Fund Recovery (ATFR) program is used for group controls of imminent assessment statutes and timely TFRP case actions. ATFR pulls data from the Integrated Collection System (ICS) and the Integrated Data Retrieval System (IDRS).

Program Effectiveness: Embedded Quality (EQ) reviews conducted by GMs assess the timeliness of TFRP case actions. Collection Automation Support and Security (CASS) provides monthly ATFR timeliness reports that measure TFRP program timeliness goals. These reports provide the information necessary to allow ROs the opportunity to make timely and appropriate TFRP recommendations and assessment actions. Collection Policy does periodic program reviews to identify trends and opportunities to improve timely and effective TFRP case actions.

ATFR tracks and records TFRP assessment actions and history. Field employees are generally the primary users of ATFR based on the employees’ duties and responsibilities.

Field Collection employees use ICS for inventory control and history documentation.

GMs approve TFRP determinations and assessment recommendations.

Territory Managers (TM) and Area Directors (AD) include TFRP timeliness trends in operational reviews.

GMs are required to follow program management procedures and controls addressed in IRM 1.4.50, Collection Group Manager, Territory Manager and Area Director Operational Aid.

This table lists commonly used acronyms and their definitions:

Additional acceptable acronyms and abbreviations are found in the ReferenceNet Acronym Database, which may be viewed at: Acronyms Database.

IRM resources

The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3), Execution Of Duties In Accord With Taxpayer Rights. For additional information about TBOR see: Taxpayer Bill of Rights and IRM 1.2.1.2.36, Policy Statement 1-236, Fairness and Integrity in Enforcement Selection.

The term "person" in Section 6672 includes, but is not limited to, the following:

Regardless of a person’s corporate title, a person will not be held liable for the TFRP unless they have the duty to account for, collect, and pay over the trust fund taxes to the government. Even an officer of the business will not be a responsible person if they are an officer in title only and have no substantive duties with the business. O’Connor v. United States, 956 F.2d 48 (4th Cir. 1992). On the other hand, a person who has no corporate title but has control of financial affairs or controls payment of funds by the business, may be held responsible for the TFRP.

A determination of liability must take into account all facts and circumstances.

A responsible person may be held liable for the TFRP if such person willfully fails to perform any one of the three duties listed in the statute: collecting, truthfully accounting for, and paying over the taxes. Slodov v. United States, 436 U.S. 238 (1978).

The statute does not impose upon the responsible person an absolute duty to pay over amounts that should have been collected and withheld by prior responsible persons. Slodov v. United States, 436 U.S. 238 (1978).

One or more persons may be responsible persons within the meaning of IRC 6672 for the same quarter. Thomas v. United States , 41 F.3d 1109 (7th Cir. 1994).

A determination of "responsibility" depends upon the facts and circumstances of each case. Common factors considered by the court include the following:

The crucial test is whether the person has the "effective power to pay the taxes owed." Purcell v. United States , 1 F.3d 932, 937 (9th Cir. 1993). A person is deemed to have such power if they possess the authority to exercise significant control over the company’s financial affairs whether or not such control is in fact exercised. Purcell at 937. Significant control generally relates to the person’s status, duty, and authority in the business that failed to carry out one of the three statutory duties. Davis v. United States, 961 F.2d 867 (9th Cir. 1992).

Those performing ministerial duties without exercising independent judgment will not be deemed responsible. See Policy Statement 5-14 (formerly P-5-60), at IRM 1.2.1.6.3.

An unpaid, voluntary board member of a tax-exempt organization will not be considered a responsible person if the board member is solely serving in an honorary capacity, does not participate in the day-to-day or financial operations of the business, and does not have actual knowledge of the failure on which the penalty is based. IRC 6672(e). This exception, however, does not apply if it results in no person being liable for the TFRP. Also, a voluntary board member of a tax-exempt organization who is intimately involved in the financial decisions of the company may be a responsible person. See Jefferson v. United States, 459 F.Supp.2d 685 (N.D. Ill. 2006) (twenty year voluntary board president of a non-profit organization who was unpaid but did not serve solely in an honorary capacity, who had check signing authority and control of financial affairs, and who was aware that trust fund taxes had not been paid, was a responsible officer who willfully failed to pay the tax).

Under IRC 6672(a), the failure to collect or pay over trust fund taxes must be willful.

Definition of willful — intentional, deliberate, voluntary, reckless, knowing (not accidental). No evil intent or bad motive is required. Domanus v. United States, 961 F.2d 1323 (7th Cir. 1992).

To show "willfulness," the government must show that the responsible party was aware of the outstanding taxes and either deliberately chose not to pay the taxes or recklessly disregarded an obvious risk that the taxes would not be paid. Phillips v. United States, 73 F.3d 939, 942 (9th Cir. 1996).

A responsible person's failure to investigate or correct mismanagement after being notified that withholding taxes have not been paid satisfies the IRC 6672 "willfulness" requirement. Finley v. United States, 123 F.3d 1342 (10th Cir. 1997).

The payment of net wages (wages minus trust fund taxes) to employees when funds are not available to pay withholding taxes is a willful failure to collect and pay over under IRC 6672. If funds are not available to cover both wages and withholding taxes, a responsible person has a duty to prorate the available funds between the United States and the employees so that the taxes are fully paid on the amount of wages paid. For purposes of determining willfulness, an employee owed wages is merely another creditor of the business, and preferences to employees over the government constitute willfulness. Hochstein v. United States, 900 F.2d 543, 548 (2d Cir. 1990).

The circuits that have decided the issue have split on whether reasonable cause negates a responsible person’s willfulness and is a defense to TFRP liability.

A mistaken belief that payments to other creditors were required to be made in preference to trust fund taxes does not make the failure to pay non-willful. Thomsen v. United States, 887 F.2d 12, 17-18 (1st Cir. 1989).

The RO has the initial duty to determine the identity of officers, partners, members, or employees who had the duty to collect or pay over the taxes.

Records to be examined may include the following:

The articles of incorporation should contain the names and duties of all officers and directors of the corporation.

Corporate by-laws and minute books may disclose the names of persons responsible for the filing of returns and payment of taxes. They may show who has the authority to sign checks, deposit money, and make loans on behalf of the corporation.

Bank records and canceled checks should be examined for payment of other financial obligations after the taxes became due.

Tax returns, if filed, may provide the name of the person responsible for filing.

Interviewing witnesses is an important factor in TFRP investigations.

The RO should prepare for the interview prior to meeting with the witness. This will increase the chances that the interview will be successful.

When conducting an interview with a potentially responsible person, the RO should determine the following:

If a potentially responsible person asserts a defense for failure to comply with the statutory requirements, all of the details surrounding the defense should be thoroughly questioned and subsequently verified.

The interview of non-responsible employees who have knowledge of the business and its decision making process may be extremely helpful in determining who is both a responsible and willful individual.

IRC 6672 is limited to the trust fund portion of the tax; that is, to the tax that the "responsible person" is required to collect or withhold from the wages of employees.

The TFRP does not apply to direct taxes such as the employer's portion of FICA or FUTA. Neither does it apply to non-collected excise taxes.

If during the investigation, the RO becomes aware of facts that indicate that a lender, surety, or third party may have indirectly or directly provided funds for the payment of employee wages, the RO should consider assertion of liability under IRC 3505(a) or IRC 3505(b). See IRM 5.17.7.3, below.

Withholding and FICA Taxes

The assessment period may be extended prior to its expiration by the consent of the person against whom the penalty is to be assessed. This extension, however, applies only to the consenting person.

For further discussion of the statutory assessment period and extensions of such period, see IRM 5.7.3.6, Statutory Assessment Period, and IRM 5.7.3.7, Extension of Statutory Assessment Period.

Under IRC 6672(b)(3), the assessment statute may be extended when the IRS mails or hand delivers the Letter 1153, Proposed Trust Fund Recovery Penalty Notification, to the responsible person. Specifically, IRC 6672(b)(3) provides that if the assessment statute is open when the IRS mails or delivers in person the Letter 1153 to a responsible person, the assessment statute shall not expire before the later of the following dates:

See also IRM 5.7.3.7.2, Impact of Letter 1153 on Assessment Statute.

The date of Appeals final determination is the earlier of the date of the Appeals Team Manager’s (ATM’s) signature on:

Refer to IRM 5.7.6, Trust Fund Penalty Assessment Action, and IRM 8.25, Trust Fund Recovery Penalty (TFRP).

It is the IRS’s policy to collect the unpaid trust fund taxes only once.

If, after the assertion of the TFRP, the corporation pays the delinquent tax, the TFRP assessment will be abated. See Policy Statement 5-14 (formerly P-5-60), at IRM 1.2.1.6.3.

Similarly, if an amount that has been collected from the responsible person(s) exceeds the amount that the corporation failed to pay, the excess may be refunded within the applicable statutory period to the person(s) that caused the excess payment. Refer to IRM 5.7.7, Payment Application and Refund Claims.

The TFRP may be collected by levy or by a proceeding in court, but only if begun within ten years after the assessment was made. IRC 6502(a).

The IRS may no longer obtain waivers of the collection period except for those waivers secured in conjunction with an installment agreement. IRC 6502. Current policy limits the use of this authority to partial-payment installment agreements. Refer to IRM 5.14.2, Partial Payment Installment Agreements and the Collection Statute Expiration Date (CSED), for guidance.

Section 507(a)(8)(C) of the Bankruptcy Code (11 USC 507(a)(8)(C)) grants priority to all taxes "required to be collected or withheld and for which the debtor is liable in whatever capacity." This includes the TFRP under IRC 6672.

Except for a super discharge under 11 USC 1328(a) in a Chapter 13 bankruptcy case, an individual debtor is not discharged from liability for the TFRP. See 11 USC 523(a)(1)(A). Thus, the IRS may collect any unpaid TFRP after the automatic stay terminates.

The automatic stay provisions of the Bankruptcy Code do not prevent the IRS from assessing and collecting the TFRP from responsible persons who are not themselves in bankruptcy. 11 USC 362.

Responsible persons, therefore, may not enjoin assessment and collection of the TFRP against them when only the corporation is in bankruptcy. In re Prescription Home Health Care, 316 F.3d 542 (5th Cir. 2002) (holding that the bankruptcy court does not have jurisdiction over a non-debtor responsible officer).

IRC 3505(a) makes third parties personally liable for the payment of withholding taxes where they pay wages directly to employees of another.

IRC 3505(a) applies to lenders, sureties, or other persons.

Liability under IRC 3505(a) extends to withholding under:

Liability does not extend to the employer's share of employment taxes; nor does liability extend to penalties that the IRS may impose on the employer.

IRC 3505(a) does not relieve an employer from responsibilities with respect to withholding taxes. The responsibilities continue even though a lender may be paying the employees' wages. The liability of the lender in such a case is to pay the taxes only where the employer does not do so.

When evaluating whether wages are being paid directly, the IRS and the courts look to the "substance" of the transaction and may find the direct payment of net wages present even though a "subterfuge" is used to disguise the substance of the arrangement. See United States v. Kennedy Construction Co. of NSB, Inc., 572 F.2d 492 (11th Cir. 1978) (subcontractor opened special payroll account out of which it issued payroll checks; however, the contractor provided the funds in the account after verifying the net wages owed each pay period and countersigned the pay checks).

IRC 3505(b) provides that a lender, surety, or other person who supplies funds to or for the account of an employer for the specific purpose of paying wages of the employees of such employer may be personally liable for any unpaid withholding taxes even though this person does not directly pay the employees’ wages.

A person within the meaning of Section 3505(b) includes the following:

Before a person can be liable under Section 3505(b), the following two conditions must exist.

It is the IRS’s position that notice to, or knowledge by, any agent of a third-party supplier of funds is imputed to the third party. This is true even if the agent conceals the facts from the supplier. United States v. Park Cities Bank and Trust Co., 481 F.2d 738 (5th Cir. 1973).

Under IRC 3505(b), the liability of the third party may not exceed 25 percent of the amount supplied to the employer for the specific purpose of paying wages.

The employer remains responsible for filing returns (Form 941).

Payments by the lender of withholding taxes reduces the liability of the employer. Similarly, payments by an employer of the withholding taxes reduces the liability of the lender.

Under both IRC 3505(a) and IRC 3505(b), if the person liable does not voluntarily satisfy the liability, the government may collect such liability by a court proceeding only.

Do not overlook the possibility that alternative remedies exist, particularly the assertion of the Trust Fund Recovery Penalty. See United States v. Security Pacific Business Credit, Inc., 956 F.2d 703 (7th Cir. 1992); Muller v. Nixon, 470 F.2d 1348 (6th Cir. 1972), cert. denied, 412 U.S. 949 (1973); Turner v. United States, 423 F.2d 448 (9th Cir. 1970).