Why Payroll Taxes Are Different
When you withhold Social Security, Medicare, and income taxes from your employees paychecks, that money belongs to the government from the moment it is withheld. You are holding it in trust. That is why they call it trust fund taxes. And that is why the IRS treats unpaid payroll taxes like you stole from the government.
The Trust Fund Recovery Penalty
The trust fund recovery penalty, or TFRP, makes individuals personally liable for the employee portion of unpaid payroll taxes. This is the IRS piercing the corporate veil without going to court. If you are a responsible person who willfully failed to pay over the trust fund taxes, the IRS assesses the penalty against you personally. Your corporation or LLC does not protect you.
Who is a responsible person? Anyone with authority to direct the payment of taxes. That includes owners, officers, directors, and sometimes bookkeepers and accountants. The IRS casts a wide net.
How the IRS Investigates
The IRS sends a revenue officer to investigate payroll tax cases. They conduct interviews with anyone who had check-signing authority or financial decision-making power. Form 4180 is the interview questionnaire they use. Every answer on that form can be used to establish that you are a responsible person.
This is where a tax attorney is critical. I prepare my clients for Form 4180 interviews. I attend the interview with them. I make sure they answer only the questions asked and do not volunteer information that expands their exposure.
Resolving Payroll Tax Debt
The IRS has limited flexibility on trust fund taxes. They generally will not accept an offer in compromise on the trust fund portion unless there are truly extraordinary circumstances. Installment agreements are available but the IRS expects aggressive payment terms. The employer portion and penalties are more negotiable.
The best strategy depends on whether the business is still operating. If it is, the first priority is getting current on deposits. The IRS will not negotiate on past-due payroll taxes while you are continuing to accrue new ones. If the business has closed, the focus shifts to minimizing the personal liability assessment.