TFRP: A possible second financial crisis for business owners

By Timothy Burke, CPA, J.D., LL.M., Braintree, Mass.

Editor: Valrie Chambers, CPA, Ph.D.

Section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, allows employers to defer the payment of the employer share of Social Security or Railroad Retirement payroll taxes owed for 2020 and make the payment in two installments — the first half of the deferred taxes are due Dec. 31, 2021, and the remainder are due Dec. 31, 2022.

Almost certainly, employers that are under financial strain due to the pandemic will decide to defer the payment of the employees' share of payroll taxes, believing that the deferral has been allowed or that relief from the failure to pay over the employees' share will be easily attainable.

The federal (and state) tax authorities, as well as the courts, have consistently held that employers are to pay over the funds that are withheld from employees. And the IRS has an eye on enforcing payroll tax past-due balances.

(Editor's note: President Donald Trump on Aug. 8 issued a presidential memorandum deferring the employee portion of certain payroll taxes on wages paid from Sept. 1 through Dec. 31, 2020. As of this writing, no guidance had been issued on how employers should implement this deferral. The remainder of this item discusses the penalties and consequences of an employer's failure to collect, account for, and pay over payroll taxes. Readers should consult the IRS guidance when it is issued regarding wages paid during the period covered by the presidential memorandum.)

Sec. 6672(a) provides that "[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax . . . shall . . . be liable to a penalty equal to the total amount of the tax evaded, or not collected. . . ." This is commonly referred to as the trust fund recovery penalty (TFRP).

The Internal Revenue Manual (IRM) states that the purposes of the TFRP include that it "makes the responsible person liable for 100% of the unpaid trust fund taxes; and it facilitates collection of trust fund taxes from secondary sources" (IRM § For employers, trust fund taxes are generally employees' share of Federal Insurance Contributions Act tax and/or federal income tax withholding.

Under Sec. 6672 a person is liable for the trust fund tax penalty if the person:

  1. Is a responsible person required to collect, account for, and pay over trust fund taxes; and
  2. Willfully fails to do so.

A responsible person can be defined as one who has the duty to perform or the power to direct collections, accounting for, and payment of the trust fund taxes. In Vinick, 205 F.3d 1 (1st Cir. 2000), the court listed seven factors that may be considered in ascertaining whether a person is responsible: The person (1) is an officer or member of the board of directors; (2) owns shares or possesses an entrepreneurial stake in the company; (3) is active in the management of day-to-day affairs of the company; (4) has the ability to hire and fire employees; (5) makes decisions regarding which, when, and in what order outstanding corporate debts, including taxes, will be paid; (6) exercises control over bank accounts and disbursement records; and (7) has check-signing authority.

No single factor determines responsibility; rather, the finding is made by the totality of the circumstances. The critical issue is whether the person had the actual authority or ability in the company to pay the taxes owed.

Generally, the possible responsible persons are officers of a corporation or the members of a limited liability company. Notably, CPAs who are involved in making financial decisions for an employer have been found to be responsible persons. The pivotal question for responsibility is the person's influence and control over the business's financial affairs.

A factor considered in nearly every case is whether the taxpayer had check-signing authority or exercised control over the business's bank accounts. While the authority to sign checks, standing alone, is generally insufficient to determine a person's liability, the IRS and the courts inquire into whether the alleged responsible person exercised authority over financial affairs.

Following the direction of a superior to not pay over the withheld taxes does not fully insulate a potentially responsible person from liability.Often, the IRS determines that more than one person is responsible. This places the burden on multiple persons to prove they are innocent, and each predictably points the finger at the other alleged responsible person or persons. The resulting conflict could be seen as giving the IRS a greater chance to collect the TFRP.

The Fifth Circuit in Hewitt, 377 F.2d 921 (5th Cir. 1967), defined willfulness as a "voluntary, conscious, and intentional" act. Willfulness has been applied to responsible persons who knew of the outstanding taxes but, rather than pay them, intentionally used available funds to pay other creditors or business expenses. An evil intent or bad motive is not required.

The courts have interpreted the willfulness prong to include recklessly disregarding known risks that the trust fund taxes were not paid. This test can be critically important, as most cases have competing facts, and the courts, without ever stating so directly, greatly consider whether the person at issue could have done a better job to protect the government's funds. In many circuits, reckless disregard includes the failure to investigate suspicions of unpaid taxes or to correct mismanagement after learning that withholding taxes have not been paid.

In Vinick, the First Circuit recognized three factual scenarios that meet this standard:

  • Reliance upon the statements of a person in control of the finances when the circumstances show that the responsible person knew the person to be unreliable;
  • Failure to investigate or to correct mismanagement after having notice of nonpayment of withholding taxes; and
  • Knowing that the business is in financial trouble and continuing to pay other creditors without making reasonable inquiry as to the status of the withholding taxes.

In Wright, 809 F.2d 425, 427 (7th Cir. 1987), the court held that a responsible person is willful under Sec. 6672 "if he (1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily."While the tests in other circuits differ somewhat, it is fair to say that the courts do not allow someone to turn a blind eye to the nonpayment of payroll taxes.

The responsibility for the failure to pay trust fund taxes is not limited to the responsible persons who failed to pay the payroll taxes at the time they were due. If someone becomes a responsible person at a time when a delinquency for employment taxes for past quarters exists and uses unencumbered funds available at that time to pay other expenses, that individual may be found to be a responsible person with regard to the delinquent taxes and liable for the amount of the funds not used to pay them.

The taxpayer bears the burden of proving by a preponderance of the evidence either that he or she is not a responsible person or that his or her failure to pay taxes was not willful.

Payroll tax liabilities can accrue over several quarters, and clients who have past-due balances often have difficulty meeting their obligations, making it difficult for them to repay those past-due taxes. When this happens, businesses might not withstand the government's collection actions, and their owners may struggle for years attempting to pay the taxes.



Valrie Chambers, CPA, Ph.D., is an associate professor of accounting at Stetson University in Celebration, Fla. Timothy Burke, CPA, J.D., LL.M., has a practice, Burke and Associates, in Braintree, Mass. Mr. Burke is a member of the AICPA Tax Practice & Procedures Committee. For more information on this article, contact

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