If your business is running behind on payroll taxes, for whatever reason, you could face serious penalties from the Internal Revenue Service (IRS) and the state of California. Defaulting on payroll taxes isn't like defaulting on other business expenses. The IRS assesses the Trust Fund Recovery Penalty (TFRP) to individuals who are responsible for failing to deposit payroll taxes.
If you're facing a TFRP, an experienced Trust Fund Recovery Penalty lawyer can help you appeal it. With a penalty this serious, you need a seasoned tax professional by your side.
What Is the TFRP?
As a business, you're responsible for withholding taxes from your employees' wages and depositing them with the IRS. These funds include their Medicare and Social Security contributions, as well as their personal income tax. You must hold these funds “in trust” until you send them to the IRS by their specific deadlines. They are called trust funds for this reason. Therefore, the TFRP is a penalty that allows the IRS to recover their trust funds from you.
What Happens Before the TFRP Appeal
While you should always act quickly when facing serious penalties like the TFRP from the IRS, the process doesn't happen overnight. The IRS does give you a reasonable amount of time to prepare documents, ask questions, or hold a hearing if need be.
The TFRP and appeal process moves through three phases: preliminary investigation, assessing the TFRP, and the appeal.
How does a TFRP start?
The entire process starts when the IRS notices your business is behind on federal payroll taxes. The IRS will send you a Federal Tax Deposit alert to let you know you're delinquent.
Revenue Officer and Form 930
If you ignore the Federal Tax Deposit alert, the IRS assigns a Revenue Officer (RO) from a local IRS office to your case. The RO's first course of action is typically sending your business a Form 930. This form will help you establish a separate account for payroll taxes to help get you back on track.
Investigation and Letter 3586
If you ignore Form 930, the RO will begin investigating. An investigation starts with interviewing potentially responsible parties of the business. If the RO wants to interview you, they'll send you a Letter 3586.
Interview and Form 4180
At the interview, the RO will gather more information from you about the business using Form 4180. This form, Report of Interview with Individual Relative to Trust Fund Recovery Penalty, is vital to the RO's investigation. You should take care when filling it out and remember that you don't have to sign it during the interview. You sign a Form 4180 under oath. Taxpayers need to consult with a tax attorney prior to signing a Form 4180.
Negotiation and Mediation
Before the RO sends a Letter 1153, formally assessing the TFRP, you and the IRS can enter into mediation to settle the matter first. Mediation is non-binding, so if either you or the IRS don't agree with the deal, either party can move forward.
TFRP Assessment and Letter 1153
Once the RO has completed their interviews, they'll send out Letter 1153, a proposed assessment letter. This letter formally starts the second phase of the process—assessing the TFRP. At this point, if you do nothing, the IRS will send you a bill for the penalty.
Steps in the TFRP Appeal Process
After receiving Letter 1153, you have 60 days from the day the letter was sent to appeal. The letter will outline how to protest the RO's findings, detailing the documentation you must provide to put your appeal request through. Keep in mind that the IRS only considers your appeal if the reason you're protesting falls within the scope of tax laws. For example, you can appeal if you believe the IRS calculated your debts incorrectly or if you have evidence they didn't have access to during the investigation. You cannot appeal if you object to the fact that you must pay taxes, however.
Small case request
If the tax you owe for one tax year is $25,000 or less, you can file a small case request instead of submitting a formal written request. For a small case request, you must send a letter requesting appeals consideration, indicating the changes you disagree with and the reasons why.
After sending your protest to appeal the IRS decision to assess a TFRP against you, the local Appeals Office assigns an Appeals Officer to your case. They will confirm with you that they've received your request via Letter 4141. Thirty days following Letter 4141, your Appeals Officer will set a date and time for a conference hearing.
Conferences may proceed informally, via telephone or in-person meeting. If you have additional documentation you'd like to send to the Appeals Officer before the conference takes place, you must send it at least five days before the conference.
The purpose of the conference is for you and the IRS to reach an agreement about settling your tax debt. If you choose to have a tax attorney, they may attend the conference on your behalf.
The Result of the Conference
The appeals conference will end in one of three ways:
- The IRS sustains their original TFRP assessment
- The IRS accepts the settlement you proposed at the conference
- The IRS offers a hazards of litigation settlement
After receiving the settlement offer, you have one week to accept it. After one week, your case goes back to Collection, and you will receive a letter requesting the outstanding tax payment in full.
If you don't accept the settlement offer, you can take your case to tax court.
Your Rights During the Appeals Process
Throughout the appeals process (after you receive Letter 1153 onward), you have certain rights with the IRS. The three most important rights granted to you are:
- The right to appeal the TFRP assessment within 60 days of receiving Letter 1153
- The right to representation (tax attorney, accountant, etc.) in your dealings with the IRS
- If you disagree with the Appeals decision, you have the right to have a court review the assessment.
Settling a TFRP
If your attempts to appeal the TFRP fail, you'll end up having to pay the penalty. If you can't pay the full amount upfront, you'll have to come to a resolution arrangement with the IRS.
3 options for paying off the TFRP
- Installment plan: You set up a repayment schedule with the IRS
- Offer in Compromise: You and the IRS agree that you can pay a lesser amount
- Apply for Currently Non-Collectible (CNC) status: The IRS agrees to pause collection, but garnishes tax refunds and can still place a lien on your property
Appealing a TFRP in California
In California, the Employment Development Department collects state payroll taxes. If employers don't file and pay their state payroll taxes, the EDD can assess penalties. The California Unemployment Insurance Code, § 1735 allows the EDD to issue a penalty of 100% of the amount of payroll taxes owed, including interest accrued.
The state of California has several other penalties related to employment tax as well. Employers are penalized for late payments, misclassifying employees, or failing to keep itemized wage statements. In addition to issuing hefty penalties, the EDD can seize personal assets.
The EDD has a penalty waiver program for situations when you feel you had a good reason not to pay employment taxes on time or at all. To be eligible for the penalty waiver, you must prove that you had either good cause or reasonable cause not to pay on time. If good cause doesn't exist, you don't have the right to the penalty waiver.
Examples of good cause
- You inadvertently sent your payroll tax forms to the wrong office
- You experience a catastrophe, such as fire or earthquake, that prevents you from filing and paying on time
- You must deal with the sudden illness of a family member which prevents you from filing and paying on time
Why Appeal a TFRP?
If you're facing a TFRP, you likely struggle to pay your employment taxes, perhaps because your business is falling behind. It's difficult to pay a large penalty when you already struggle to keep your business solvent. Appealing a TFRP gives you a chance to relieve that penalty and keeps you from having to pay a large sum of money to the IRS. If you think there's any possibility that you could argue against a TFRP and get a favorable outcome, you have to at least try.
Need Help Appealing a TFRP?
Dealing with penalties from the IRS and the EDD can take its toll. The process is overwhelming, especially if you're trying to keep your business afloat and aren't well-versed in federal tax law. An experienced tax attorney can help you navigate the TFRP appeals process, ensuring you know your rights and preparing the best solution for you. Contact a California Tax Attorney today to set up an initial consultation to discuss your TFRP appeal.