The Trust Fund Recovery Penalty (TFRP) is one of the harshest tax provisions on the books. Under the TFRP, a company owner, officer or other employee may be held liable for 100% of the company’s unpaid payroll taxes — which is why the assessment is sometimes called the “100% penalty.” Contractors beware: The TFRP can severely damage, if not destroy, your construction business and threaten your personal financial security.
The TFRP may be applied to any person who’s: 1) responsible for collecting or paying withheld income and employment taxes or for paying collected excise taxes, and 2) willfully fails to collect or pay those taxes. Be aware that the IRS has broad interpretations of these two requirements.
For example, a “responsible person” is any person — or group of people — who has the duty to perform and the power to direct the collection, accounting and paying of trust fund taxes. This person might be:
- An officer or 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 not-for-profit organization,
- Another person with authority and control over funds to direct their disbursement, or
- Another corporation or third-party payer.
Similarly, the IRS broadly interprets the requirements for a “willful failure.” The failure doesn’t have to be intentional. For instance, the TFRP may be applied in situations where the responsible person knew, or should have known, about the taxes that should have been paid but, in fact, weren’t.
If the IRS determines that you’re a responsible person, it will mail you a letter stating that it plans to assess the TFRP against you. You have 60 days (75 days if this letter is addressed outside the United States) from the date of the letter to appeal. The letter will explain your appeal rights. If you don’t respond to this communication, the IRS will assess the penalty against you and send a Notice and Demand for Payment.
Once the TFRP is assessed, the IRS can take collection actions against your personal assets. It may, for example, file a federal tax lien or take levy or seizure action.
U.S. v. Samango
A recent Pennsylvania court case illustrates how easily a construction company owner can be found negligent. The defendant in U.S. v. Samango was the sole shareholder and president of a concrete construction company. As president, he supervised all aspects of the business, including reviewing and signing all federal and state tax returns. In addition, he was a minority shareholder and president of a framing company. In this capacity, he approved, signed and submitted various tax forms and documents to federal and state tax authorities.
Both companies had the same business address and phone number. They also shared top-level management and employees. In 2008, the concrete business subcontracted with the framing company to help on a construction project.
While the owner was president of both businesses, he signed checks from the concrete construction company’s account to pay the framing company’s liability for state unemployment compensation insurance. He also approved, signed and submitted to the IRS the Federal Unemployment Tax Act (FUTA) form for the framing company.
Subsequently, the IRS assessed the TFRP against the owner, claiming he was a responsible person who failed to pay trust fund taxes for the four quarters during which the framing company worked with the concrete construction company as a subcontractor. But the owner objected. He argued that he was only a minority shareholder; had no knowledge of the company’s finances, operations or general decision-making; and held no power or authority to pay its taxes.
However, when the case came before a Pennsylvania district court, it found that the owner was a responsible person who willfully failed to pay taxes. The court rejected the owner’s claim that he wasn’t responsible because he had no oversight or control of the framing company’s finances. After all, the court reasoned, he signed and certified government forms on the company’s behalf. He also paid taxes owed by the framing company with funds from the concrete company’s account for which he had signatory authority.
The owner admitted at trial that he didn’t take any steps to ensure that the framing company’s taxes were being paid. This hurt his case. As president, he should have known that there was a grave risk that the taxes weren’t being paid. And he could have easily found out whether they were being paid. In the end, the owner was ordered by the court to pay $900,000 in unpaid employment tax.
With the TFRP, the stakes for tax compliance are high. To protect your construction business and personal assets, ensure that payroll tax deposits are made to Uncle Sam in a timely manner.