One unexpected quirk of the tax code is that, in some situations, individuals can be personally liable for their company's unpaid payroll taxes. Known as the Trust Fund Recovery Penalty, individuals who fall under it can face serious penalties.

The Trust Fund Recovery Penalty (TFRP) kicks in when a business fails to pay taxes such as federal income tax withholding, Social Security, and Medicare. TFRP is unique because it makes individuals personally liable for a business's unpaid taxes.

Who Falls Under TFRP?

Individuals may face personal liability under TFRP when:

• They're responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes.

o   Examples of a responsible person include an officer of a corporation, a member of a partnership, or a corporate director or shareholder.

and

• They willfully fail to collect or pay those taxes.

TFRP doesn't involve all failures to cover payroll taxes. An individual may be liable for unpaid payroll taxes when they have acted willfully. This means that:

• The individual was or should have been aware of the unpaid taxes

and

• The individual either intentionally disregarded the law or was plainly indifferent to its requirements.

o   TFRP doesn't require the individual to have evil intent or bad motive.

What is the TFRP Penalty?

To determine an individual's penalty, the IRS will compute the penalty based on:

• The unpaid income taxes withheld

and

• The employee's portion of the withheld FICA taxes.

The IRS will issue a warning to a responsible person, and that person will then have 60 days to appeal or otherwise respond. If an individual ignores the IRS, at the end of the 60-day period, the IRS can begin a collection action against the individual's assets.

As soon as an individual learns their assets may be seized under TFRP, they should contact an attorney. Individuals have 60 days to build a defense, including defending against claims that they're personally liable.

Showing that an individual doesn't qualify as a responsible person or that there was no willful failure to pay taxes are two ways that individuals can defend themselves against facing a TFRP penalty. A qualified tax attorney can identify the best defense for each individual's situation.

If you have questions about TFRP or personal tax liability, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.