Trust Fund Recovery Penalty

The recent Tax Court decision in Woodley v. Commissioner, T.C. Memo. 2017-242, demonstrates the hazards of trust fund recovery penalties (TFRPs) for taxpayers.  A TFRP is a penalty imposed by section 6672(a) on anyone who is responsible for paying payroll taxes but who willfully fails to do so.  Generally, the TFRP is the amount the employer withheld from its employees’ wages that was not paid to the IRS.

The petitioner in Woodley was an officer, employee, and part owner of LAJE, a corporation that operated a sandwich shop in the U.S. Virgin Islands.  LAJE became delinquent on its employment taxes, and the IRS assessed employment taxes against it for seven quarters in 2007 and 2008.  The IRS sent the petitioner a trust fund recovery penalty letter, informing her that it had determined that she was one of the people required to collect and pay over LAJE’s employment taxes.  The IRS also assessed TFRPs against another owner of LAJE for the same trust fund tax liabilities.

The petitioner argued that the IRS could not collect the TFRPs from her because it was receiving payments from another party for the same underlying tax liabilities.  The Tax Court disagreed.  It noted that section 6672 imposes liability on “[a]ny person required to collect . . . and pay over any tax imposed by this title” but who willfully did not.  The Tax Court observed that employers are liable for trust fund taxes that should have been withheld.  Importantly, when TFRPs are assessed, multiple individuals and entities may be liable for the same penalties from the same unpaid tax.  The IRS can try to collect simultaneously from an employer, as well as other responsible persons.

This case serves as a reminder of the extensive liability taxpayers face if they fail to pay trust fund taxes.