8.25.1. Trust Fund Recovery Penalty (TFRP) Overview and Authority

(1) IRM 8.25 provides guidance to Appeals employees on the legal and procedural requirements affecting the various types of TFRP cases worked in Appeals.

• IRM 8.25.1describes the various types of TFRP cases and the point in the Compliance process when they can come to Appeals.

• IRM 8.25.2 covers Appeals Technical Employee (ATE) procedures for TFRP appeals from case receipt through closure.

(2) The TFRP facilitates the collection of tax and enhances voluntary compliance. The TFRP is intended to serve as an alternative means for collection of unpaid trust fund taxes when not fully collectible from a business that does not pay the taxes. .

(1) IRC 6672 is the authority for the TFRP. The TFRP is a penalty against any responsible person required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities. The TFRP may be imposed for:

• Willful failure to collect tax,

• Willful failure to account for and pay tax, or

• Willful attempt in any manner to evade or defeat tax or the payment thereof.

(2) According toIRC 6672, the TFRP is equal to the total amount of tax evaded, not collected, or not accounted for and paid over. IRC 6672 applies to the employees' portion of employment tax, namely, the withheld income tax and employee's portion of FICA. It does not apply to the employers' portion of employment taxes. The TFRP also applies to collected excise taxes.

(3) The IRS’s policy on assertion of the trust fund recovery penalty is in Policy Statement 5-14, Trust Fund Recovery Penalty Assessments. See IRM 1.2.14.1.3, Policy Statement 5-14 (Formerly P-5-60).

(1) Appeals is the sole function that may make the final administrative determination for purposes of IRC 6672(b)(3)(B).

(1) Planning, Quality and Analysis (PQA) provides trends and data analyses and detailed summary reports for Appeals.

(1) The table below lists common acronyms used in this section:

(1) IRM 8.25.2, Working Trust Fund Recovery Penalty Cases in Appeals, provides guidance to Appeals employees on working TFRP cases.

(2) Guidance for Account & Processing Support (APS) employees for TFRP processing procedures is contained in IRM 8.20.5 (carding in) and IRM 8.20.7(closing).

(3) The Taxpayer Bill of Rights, TBOR, applies to Appeals employees’ interactions with taxpayers. For more information, visit http://irweb.irs.gov/AboutIRS/tbor/default.aspx.

(1) The TFRP is normally applied to tax liabilities associated with employment tax returns for withheld Income Tax, withheld Social Security Tax, or withheld Railroad Retirement Tax.

(2) IRC 3402(a) requires employers to withhold income tax from employees’ wages.

(3) IRC 3102(a) requires employers to withhold Social Security tax.

(4) IRC 7501(a) provides that these withheld funds are held by the employer in trust for the benefit of the United States.

(5) IRC 1446 requires certain partnerships with foreign partners to withhold tax on the foreign partners' share of effectively connected income.

(6) The fiduciary liability to withhold and ultimately pay over trust fund taxes arises at the time wages are paid. This is true even though the deadline for payment and/or reporting the withheld portion of wages may be some time later.

(7) The TFRP allows the government to reach parties otherwise shielded from tax liability, such as:

1. officers

2. shareholders

3. employees of a corporation, partnership or LLC

4. outside entities, in some cases

(1) Although most TFRPs are asserted for failure to pay over withheld employment taxes, the penalty also applies to "collected" excise taxes. Penalties on collected excise taxes may be asserted on persons responsible for collecting, accounting for, and paying over the taxes to the Government. Taxes in this category and their Code sections are:

• Taxes on certain communications services, IRC 4251;

• Taxes on indoor tanning services, IRC 5000B;

• Taxes on certain transportation by air, IRC 4261 and IRC 4271; and

• FIRPTA taxes (withholding from the disposition of a United States real property interest by a foreign person), IRC 1445.

(2) IRC 4263 (c) requires the air carrier that provides a person's initial segment of air transportation that begins or ends in the United States to pay the section 4261 tax, even if it wasn’t collected.

(3) To the extent the 5000B tax is not collected, the tax shall be paid by the person who performs the indoor tanning service. See IRC 5000B(c)(3).

(4) The TFRP on excise tax is usually asserted against the collecting agency. However, if there is doubt that the penalty can be collected from the collecting agency alone, the penalty may be asserted against the responsible persons of the collecting agency and /or the collecting agency.

(5) The assessment statute expiration date (ASED) for excise tax (and Railroad Retirement Tax Act (RRTA)) is generally 3 years from the due date of the return (without regard to any extension) or from the date the return was filed, whichever is later. See IRC 6501.

(1) When the primary taxpayer is a Limited Liability Company (LLC), TFRP consideration is usually appropriate-

1. For all classifications of LLCs, when considering an employee or non-member third party, the usual procedures for determining responsibility and willfulness apply.

2. When the LLC is classified as a corporation for tax purposes, the usual procedures apply.

3. When the LLC is classified as a partnership for tax purposes, the members are not liable for the company debts under state law; so, a TFRP determination is required in order to hold members responsible.

(2) TFRP consideration may not be necessary for the single member owner (SMO) of a LLC that did not elect to be treated as a corporation:

1. For certain excise taxes that accrued prior to January 1, 2008 and for employment taxes on wages paid before January 1, 2009, a single member LLC that did not elect to be treated as a corporation is disregarded as an entity separate from its owner, and the SMO is personally and fully liable for all employment taxes, not just the trust fund portion.

2. A TFRP investigation is required where an otherwise disregarded LLC is treated as a corporation for certain excise taxes that accrue on or after January 1, 2008 and for employment taxes on wages paid on or after January 1, 2009.

   Note: See also IRM 5.1.21.6.5, Trust Fund Recovery Penalty, and Exhibit 5.1.21.3.

(1) A "responsible person" is one who has the duty to perform or the power to direct the act of collecting, accounting for, or paying over trust fund taxes. When evaluating responsibility, consider the factors established in cases in the same circuit, or a higher court, that most resemble the ATE’s case. Cases with similar issues can be Shepardized to locate similar cases in the different circuits.

(2) Most TFRP cases involve officers of corporations. However, a responsible person may be one or more of the following:

1. an officer or employee of a corporation

2. a member or employee of a partnership

3. a corporate director or shareholder

4. a related controlling corporation

5. employee of a sole proprietorship

6. limited liability company (LLC) member, manager or employee

7. a Payroll Service Provider (PSP)

   Note: The use of a third-party payer such as a PSP or a PEO does not relieve the common law employer and employees of the common law employer who are responsible for collecting, accounting for, and paying over the common law employers' employment taxes from the responsibility of ensuring that all of the common law employers' Federal employment tax obligations are met.

8. a responsible party within a PSP

9. a Professional Employer Organization (PEO)

10. a responsible party within a PEO

11. a responsible party within the common law employer (client of PSP/PEO)

12. a lender, a surety, or any other person with sufficient control over funds to direct disbursement of the funds, or

13. in some cases, a person assuming control after accrual of the liability.

    Note: For issues involving responsibility after the fact, see Slodov v. United States, 436 U.S. 238 (1978).

(3) In each situation, determine who had a duty to see that taxes were withheld, collected, or paid over to the government at the specific time the failure occurred.

(1) The trust fund recovery penalty is a civil penalty; so the degree of willfulness in failing to collect or pay over any tax leading to liability for this penalty is not as great as that necessary for criminal proceedings. Willfulness in the context of the TFRP is defined as intentional, deliberate, voluntary, and knowing, as distinguished from accidental. "Willfulness" is the attitude of a responsible person who with free will or choice either intentionally disregards the law or is plainly indifferent to its requirements. Some factors to consider when determining willfulness are:

• Whether the responsible person had knowledge of a pattern of noncompliance at the time the delinquencies were accruing;

• Whether the responsible person had received prior IRS notices indicating that employment tax returns have not been filed, or are inaccurate, or that employment taxes have not been paid;

• The actions the responsible party has taken to ensure its Federal employment tax obligations have been met after becoming aware of the tax delinquencies; and

• Whether fraud or deception was used to conceal the nonpayment of tax from detection by the responsible person.

(2) Appeals employees must determine if the actions/inactions of a responsible person who permits funds withheld as tax to be used to pay operating expenses of the business are willful. Were the person’s explicit or implicit directions willful to a degree sufficient to make the person liable for the TFRP? There is no need to show that a responsible person had any evil intent or desire to defraud the Government of the withheld taxes. When determining willfulness, Appeals officers must research the large body of Court decisions on this topic and Shepardize. Starting points for common willfulness issues include:

• 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, (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 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, 1991 U.S. Dist. LEXIS 5317.

• 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).

(3) The circuits are split on the issue of allowing a reasonable cause defense to negate willfulness:

• The Eighth and First Circuits have determined that reasonable cause is not a defense. Olsen v. United States, 952 F.2d 236 (8th Cir. 1991); Harrington v. United States, 504 F.2d 1306 (1st Cir. 1974).

• The Ninth Circuit has not stated specifically that the reasonable cause defense does not apply; however, it has determined that "conduct motivated by a reasonable cause may, nonetheless, be willful." Phillips v. United States, 73 F.3d 939 [*942] (9th Cir. 1996).

• The Tenth, Eleventh, Second, and Fifth Circuits have determined that the reasonable cause defense could apply to willfulness determinations under Section 6672, but under extremely limited circumstances. Smith v. United States, 555 F.3d 1158 [*1170] (10th Cir. 2009) (reasonable cause defense must be narrowly construed with respect to Section 6672); Thosteson v. United States, 331 F.3d 1294 [*1301] (11th Cir. 2003) (court does not decide whether reasonable cause applies, but notes that this defense is exceedingly limited); United States v. Winter, 196 F.3d 339 [*345] (2d Cir. 1999) (reasonable cause defense negated willfulness only if the responsible person reasonably believed that taxes were being paid); Logal v. United States, 195 F.3d 229 [*233] (5th Cir. 1999) (reasonable cause defense is exceedingly limited.).

(1) For each person that Collection determines is responsible for the TFRP, each quarterly period in dispute is a distinct work unit which requires it's own consideration. The corporate name is noted on each work unit.

(2) Separate assessments are made against each responsible person for the total amount of that person’s liability for each quarter.

(3) The IRS does not divide the assessments between the responsible persons, so the full amount may be collected from any one of them. In cases where a person is found responsible for only part of the liability, assessments are made for those portions only.

(4) In years prior to 2001, TFRP assessments were combined such that in the examples above, only one assessment would have been made against each of the responsible persons for the total amount of all quarters.

(5) Even though the IRS may make assessments against more than one responsible person for a particular quarterly liability, it ultimately only collects the total amount once. See Policy Statement 5-14. The business or one responsible person may pay the entire amount, or everyone responsible may split payment of the amount. Depending on the timing of Collection efforts, the IRS may collect one portion from one, a larger or smaller portion from another, and the balance from yet one or more other responsible persons.

(6) When possible, related cases involving two or more officers of the same corporation are transmitted to Appeals at the same time. However, responsible persons may be in different locations and considered by different Appeals offices. When these cases are in separate jurisdictions, Appeals employees need to coordinate their findings.

(7) Counsel may ask for assessments against a party who was not previously determined to be a responsible person to support a third-party action in court against persons potentially responsible for the liability. Administrative appeals will not be available in these cases. In this situation, IRC 6672(b) does not apply. The IRS should defer from making notice and demand for the TFRP assessment that was requested by Counsel. If the Government is successful with respect to the assessed third party in the refund proceeding, then the IRS may rely on the judgment (rather than on its usual federal tax lien) in order to effect collection of the TFRP amount sustained by the court.

(1) IRC 7521, which was part of the Taxpayer Bill of Rights 1 (TBOR1), provides for audio recordings by the taxpayer upon advance notification.

(2) Appeals will allow audio recordings on all cases that have face-to-face conferences on issues not deemed frivolous. In all such cases, the taxpayer must follow the requirements of IRC 7521: give 10 days advance notice, and provide their own recording equipment. The ATE will also make an audio recording of the conference with IRS equipment.

(3) Procedures for making audio recordings are described in Notice 89-51, 1989-1 C.B. 691. Appeals employees will follow the provisions of that Notice, or its successor, when allowing recordings in cases within Appeals jurisdiction.

(1) The Taxpayer Bill of Rights 2 (TBOR2), enacted on July 30, 1996, requires the IRS to send a preliminary 60-day notice of proposed assessment at least 60 days before making notice and demand for payment of the TFRP. Assessment is delayed during the 60-day period, and if the taxpayer files a protest, until a final determination is made unless it is determined that collection of the TFRP is in jeopardy. The preliminary notice, Letter 1153 (DO), provides for the protest of the proposed assessment.

(2) The issuance of the Letter 1153 (DO) prevents the Assessment Statute from expiring during the 60-day protest period and for an additional 30 days to allow for assessment (90 days total). A protest is timely if it is mailed on or before the 60th day (75th day if the letter was addressed outside the United States) after the mailing or personal delivery of Letter 1153 (DO). This gives the taxpayer a full 60 days (75 days if the letter was addressed outside the United States) to respond to Letter 1153 (DO). The 60- or 75-day appeal period begins the day AFTER the Letter 1153 (DO) is mailed or personally delivered.

(3) To provide the IRS time to process the assessment or appeal, TBOR2 included a provision that extends the assessment statute under certain circumstances. Pursuant to IRC 6672(b)(3), if the 60-day notice is issued before the expiration of the assessment statute, the statute will not expire before the later of:

1. the original ASED,

2. the ASED extended by a waiver (Form 2750), properly executed,

   Note: Check IDRS for TC 971 AC 330 indicating the responsible party signed a waiver

3. 90 days after the 60-day notice was mailed or delivered in person, or

4. if a timely protest is filed, 30 days after Appeals' final administrative determination, defined below.

   Note: The ASED is not extended by (d) in Fast Track Mediation cases

(4) Appeals is the sole function that may make the "final administrative determination" for purposes of IRC 6672(b)(3)(B). To ensure that the statute is protected on these cases, Appeals will not release jurisdiction before the case is resolved, e.g., Appeals will not release jurisdiction on cases that are under-developed or that come to Appeals with incomplete files. Issues raised by the taxpayer will be determined based on the information available in the file and provided by the taxpayer during the conference.

(5) The ASED, suspended during the appeals process, begins running again on the earlier of the date of the Appeals Team Manager's (ATM) approval signature (the final administrative determination) on

• Form 5402, Appeals Transmittal and Case Memo, or

• Form 866 or Form 906, Closing Agreements

(6) When the ATM enters a closing date on the Appeals Centralized Database System (ACDS) on a case with a TBOR2 statute code, ACDS automatically removes the TBOR2 statute code and generates a revised statute date in the statute date field by adding 30 days to the ATM Approval Date (ACAPDATE). The ATM should ensure that the approval signature dates on Form 5402, Form 866, or Form 906 are identical to the ACAPDATE.

(1) Section 1001(a) of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) Public Law 105-206 provides that the Commissioner shall ensure an independent Appeals function that prohibits ex parte communications between appeals officers and other IRS employees that appear to compromise the independence of the appeals officers.

(2) Rev. Proc. 2012-18, effective for communications after May 15, 2012, contains the general rules governing ex parte communications between Appeals and employees from other IRS functions. IRM 8.1.10, Ex Parte Communications, has supplemental information and guidance specifically for Appeals employees, including documentation requirements and procedures for curing ex parte communication breaches.

(3) Ex parte communication issues that Appeals employees need to be particularly aware of include-

1. The date and content of the Collection history and if entries made after receipt of the protest were shared with the taxpayer/representative.

   Note: See section 2.03(4)(c) of Rev. Proc. 2012-18 and IRM 8.1.10.4.2 for rules and guidance on the administrative file.

   Note: Pursuant to IRM 5.7.4 , Trust Fund Compliance, Investigation and Recommendation of the Trust Fund Recovery Penalty, and IRM 5.7.6 , Trust Fund Compliance, Trust Fund Penalty Assessment Action, Collection no longer permits inclusion of summary narrative memorandums and/or rebuttals

   .

2. The content of discussions between Appeals and Collection Control Point Monitor (CPM) employees, which are strictly limited to communicating the current status of the TFRP case and requesting updates to ATFR calculations.

   Example: If case is still open, or when closed and date closed and calculating Form 2749 updates through ATFR.

(1) RRA 98 includes IRC 7123(b), which requires the Secretary to prescribe procedures under which a taxpayer or Appeals may request non-binding mediation on an issue unresolved at the conclusion of appeals procedures or an unsuccessful attempt to enter into a closing agreement under IRC 7121.

(1) IRC 6103(e)(9) provides for disclosure of information where more than one person is held liable for the TFRP. Once a person is determined to be liable then, upon their written request, the IRS may disclose, in writing, the name of any other person determined to be liable, whether the IRS has attempted to collect the penalty from the other liable person, the general nature of the collection activities and the amount collected.

1. A person is determined to be liable for purposes of IRC 6103(e)(9) when that person is assessed. Therefore, no disclosure is permitted until after the person is assessed.

2. If Appeals receives a disclosure request with ONLY a request for the names of liable persons, the written request may be responded to once an assessment is made. Appeals should make no disclosures concerning the collection actions, since we are not in a position to know everything that may have occurred. Refer those requests to the Disclosure or Collection function

3. Also, do not disclose names on any pending cases, since disclosure is only permitted TO ASSESSED trust fund recovery penalty persons ABOUT ASSESSED trust fund penalty cases. These IRC 6103(e)(9) disclosures are permissible to the assessed responsible officer or their attorney-in-fact. (Normally, this would be a person given a Power of Attorney by the responsible person in order to practice before the IRS relative to the TFRP issue).

(2) For more information, refer to IRM 21.1.3.2, General Disclosure Guidelines, and for a full discussion, refer to IRM 11.3.40, Disclosure of Official Information, Disclosures Involving Trust Fund Recovery Penalty Assessments.

(1) Fast Track Mediation (FTM) takes place while the TFRP is still under the jurisdiction of SB/SE Collection. Appeals becomes involved by serving as a mediator trying to facilitate settlement negotiations between SB/SE Collection and the taxpayer.

(2) Rev. Proc. 2016-57 is the authority for FTM in Collection cases. The goal of FTM is to help taxpayers resolve TFRP disputes with Collection before a decision is final. If a settlement can be negotiated while the case is still with Collection, it eliminates the need for a formal TFRP appeal. Refer to IRM 8.26.3, Alternative Dispute Resolution (ADR) Program, Fast Track Mediation for Collection Cases, for guidance on FTM.

(1) After an RO establishes responsibility and willfulness and determines collectibility, they recommend assessment of the TFRP and issue a Letter 1153 (DO), which provides the taxpayer with an opportunity to have their cases heard in Appeals prior to assessment.

(1) A jeopardy assessment may be made by Collection when a responsible person appears to be placing assets beyond the reach of the Government to defeat collection of a potential liability. When a jeopardy assessment is made on an unagreed TFRP liability, because the taxpayer has not had an opportunity to appeal, the taxpayer will be given post-assessment appeal rights. Jeopardy assessment TFRP cases must be worked expeditiously.

(2) For an administrative review of a jeopardy assessment, the taxpayer must file a written proposal with the Area Director within 30 days from the date of the notice of jeopardy assessment letter, requesting redetermination of whether or not:

1. the making of the assessment is reasonable under the circumstances, and/or

2. the amount so assessed or demanded as a result of the action is appropriate under the circumstances.

(1) After the TFRP has been assessed, the taxpayer may file a formal or informal claim.

(2) A claim is either:

• a request for abatement of assessed tax, or

• a request for refund of a tax paid or of a credit not previously reported or allowed.

(1) Post-Appeals mediation (PAM) for TFRP became permanent on December 29, 2014.

(2) PAM takes place after settlement negotiations between Appeals and the taxpayer are complete but unsuccessful. PAM occurs while the TFRP is under Appeals' jurisdiction, which means the written request for mediation must be made before the case is closed by Appeals.

(3) Refer to PAM procedures in Rev. Proc. 2014-63 and IRM 8.26.9, Alternative Dispute Resolution (ADR) Program, Post-Appeals Mediation Procedures for Collection Cases.