When a business fails to pay payroll taxes, the IRS may hold certain individuals personally liable for the unpaid taxes. Known as the Trust Fund Recovery Penalty (TFRP), this penalty covers unpaid income and employment taxes, such as Social Security taxes.

The IRS may levy the TFRP against any individual who qualifies as someone who:

• Was responsible for collecting or paying the taxes

and

• Willfully failed to collect or pay them
  • The IRS uses a broad definition for willful. For example, opting to pay other accounts or creditors instead of payroll taxes may be viewed as willful.

In addition to potentially covering officers or employees of a business, the penalty may also apply to a separate business or other third-party payer.

What is the TFRP Interview?

Individuals may receive IRS Letter 3586, which informs them that the IRS wants to schedule an appointment for a TFRP interview. The goal of this interview is for the IRS to get information to help them determine who is responsible for the penalty.

Generally, TFRP interviews will focus on questions about the individual's role in the business. This may include determining how much independent judgment they exercised within their job. For example, if a person's job responsibilities included paying bills as directed by a manager, for TFRP purposes, that person would likely not be considered responsible.

The interview may also cover what the individual knows about other people's responsibilities. This may also be done indirectly or by eliminating the individual being interviewed as a potential responsible person.

Common questions that TFRP interviews may include:

• Who was in charge of payroll?
• Who signed off on payroll?
• Who had access to bank accounts?
• Did anyone else review payroll or tax information?
• What role, if any, did the individual have with the company's financial decisions?
• Who was in charge of making federal tax payments?

Individuals should be honest throughout the process. Providing wrong information can hurt them in the long run. If an individual is unsure of the answer, they should say so and not guess.

Individuals should work with a tax attorney before the interview and have their attorney present during the interview. An attorney can help them prepare for the interview, consider questions that might be asked, and help with preparing answers. Individuals may also wish to review financial records and other documents before the interview.

For questions related to TFRP or other issues related to income and employment taxes, 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.