Whose Afraid of the Big Bad TFRP?

Whose Afraid of the Big Bad TFRP?

Welcome to the official blog of Brittany Lanphier, managing partner of Lanphier LLP based in Denver, Colorado!

Any tax guidance in this blog is intended for informational purposes only and is not guidance on which Lanphier LLP intends for you to rely. All tax issues specific to your business or family are largely facts-and-circumstances based and you should consult your tax advisor (or Brittany directly) to discuss how this might relate to you.

October 1, 2012

Well, hello Fall!   I cannot believe how quickly summer came and went.  Now, the leaves are changing, there is a distinct chill in the air, and the mountains are capped with a little sprinkling of snow in the distance.  For those that don’t know me, I am NOT a winter gal.  I do not like cold weather in the least.  In fact, I like HOT weather…I am a Texas girl at heart after all.  I love being outdoors – playing tennis, chasing Brooklyn around the playground, and most of all, not bundling up before leaving the house or brushing snow off my car before driving on icy roads (which, as a Texas girl, I am also completely unqualified for).

With all that said, fall in Colorado is spectacular.  This weekend’s weather could not have been more perfect.  We had a wonderful time taking Brooklyn to the Denver Zoo on Saturday and watching the Broncos win on Sunday, followed by some quality time at the park.  Hard to beat even if it does mean that winter is on it’s way!

Fall is a busy time for us but “in a good way” as I like to say.  We do have to push hard around the 2 extended tax return deadlines (9/15 and 10/15).  I find that September 15th usually feels like the more stressful of the two, since we file a lot of business returns at that time.  The volume/number of returns is nowhere near what it is in the spring, but the returns are more complex and take more time.  The positive is that we have usually done about half of the work already in filing the extensions so that helps it feel more manageable.  Once we get through October, we have a few months to breathe a bit before things get really crazy again in January.

Employment Taxes & the Trust Fund Recovery Penalty

Today’s post is another public service announcement for all those employers out there: PAY YOUR EMPLOYMENT TAXES.  ON TIME. ALL THE TIME.  FOREVER AND EVER, AMEN.

I know, I know.  Times are tough.  Businesses are struggling with cash flow, trying to avoid layoffs and defaulting on loans.   But here I am to tell you why you don’t want to forgo paying in your federal tax deposits.  It is a fun little nugget in the tax code called the “Trust Fund Recovery Penalty” (TFRP).

The TFRP is not a penalty in the usual sense, like a penalty assessed because of a failure to file a return or pay the tax due with a return (although believe me, these traditional penalties apply for not filing/paying your employment tax returns).   The TFRP is a penalty assessed against any individual who is “required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities.”

Say what?  You may not realize, but when you withhold taxes from your employees paychecks (federal withholding, employee’s portion of FICA) you are holding taxes “in trust”.  If you then use that withheld money and pay your office rent or (gasp!) take an owner’s distribution, you are basically stealing from your employees in the IRS’ eyes.   Therefore, if the business fails to pay these taxes, the IRS will come after any individual that was both responsible for the taxes and willfully failed to pay them.  There is no limited liability or other corporate protection that helps in this situation either – the IRS can come after you and your personal assets to collect the unpaid trust fund taxes.

Now, if you are paying attention, you will notice that I said any individual that meets both the responsibility test and the willfulness test, not just owners of the business.   This means that it could potentially apply to employees of the organization as well, such as a CFO, controller, or other individual with the authority to make financial decisions for the business.

Wait there is more good news.  Any individual who is determined to meet both tests described above is responsible for 100% of the tax.  Therefore, if you have 2 business partners, you are not responsible for one-third of the taxes, you are responsible for ALL of it.  If your partners don’t have sufficient assets to cover their share, you could end up paying the whole thing.   Bonus – trust fund taxes are not dischargeable in bankruptcy!

FYI, in a TFRP case, it doesn’t necessarily matter who was “most responsible”.  If you are responsible (and willful) at all, they can collect from you.  It is common in these cases to see a lot of finger pointing about whose idea it was in the first place not to pay the taxes, but ultimately this doesn’t matter if it is determined that you had the authority to pay them anyways.

Alright, I hope you are sufficiently quaking in your boots at this point.  There is a LOT that I didn’t cover here, specifically on what constitutes both responsibility and willfulness, as well as all the procedural aspects that go into a TFRP case.   But this just being a PSA, here are a few closing thoughts:

  • Pay your employment taxes.  For real.
  • If you miss a weekly or monthly deposit, do everything you  can to pay the balance by the time you file the return at the end of the quarter.
  • If you are an owner or an employee that handles financial matters for a business where you are aware that employment taxes are NOT being paid, I recommend that you seek counsel promptly.  Don’t wait until it has gotten out of control and the IRS has contacted you about an interview.   Get some advice on how to best mitigate your exposure to the TFRP.

If you have any specific questions regarding the TFRP and how it may apply in your situation, please contact our firm.  We are seeing more of these cases recently, most of them dating back to somewhere between 2008-2010 when the economy really tanked, and I anticipate more in the coming years.   We would be glad to help you navigate this particularly tricky area of the tax code.

Well, after reading that, I encourage you to go take a nice deep breath of fresh fall air!  Just remember to take those employment taxes seriously, especially as we approach the third quarter payroll tax return deadline later this month.

Until next time!

Brittany

 

 

 

Welcome to the official blog of Brittany Lanphier, managing partner of Lanphier LLP based in Denver, Colorado!

Any tax guidance in this blog is intended for informational purposes only and is not guidance on which Lanphier LLP intends for you to rely. All tax issues specific to your business or family are largely facts-and-circumstances based and you should consult your tax advisor (or Brittany directly) to discuss how this might relate to you.