Handle payroll taxes properly – or face penalties

IRS enforcement of the responsible person penalty is likely to increase.

If an employer fails to properly pay over its payroll taxes, the IRS can seek to collect a trust fund recovery penalty (TFRP) equal to 100 percent of the unpaid taxes from a “responsible person.” A responsible person is any individual who:

  • Is responsible for collecting, accounting for and paying over payroll taxes and
  • Willfully fails to perform this responsibility.

Those who work in or oversee the payroll functions, among others, could be considered responsible persons.

The Treasury Inspector General for Tax Administration (TIGTA) has issued a report finding that the IRS has often not taken adequate and timely actions in assessing and collecting the responsible person penalty.

While noting that, beginning in 2008, the IRS has issued and generally implemented new TFRP guidance that has improved the penalty process, TIGTA has concluded that significant numbers of incidents of untimeliness or inadequacies still exist. The inspector general said that, when penalty assessments are not made timely, taxpayers’ financial ability to pay can decline, thereby decreasing the IRS’s chances to collect the trust fund taxes due. In addition, the federal government’s interest is not protected if potential TFRP assessments are overlooked or missed.

The inspector general recommended that the IRS emphasize to group managers their responsibilities to monitor trust fund recovery penalty cases and to:

  • Ensure that revenue officers take timely penalty actions
  • Enhance TFRP communication and training
  • Ensure completion and adequacy of scheduled system improvements and take appropriate actions to implement the changes
  • Revise TFRP guidance regarding the accuracy of the collectability determination support and controlling the completion of TFRP investigations when installment agreements or currently not collectible closures are approved

In their response to the report, IRS officials agreed with all of the recommendations and announced their plan to take corrective actions.