TFRP: A possible second financial crisis for business owners.

• Author: Chambers, Valrie
• Position: Trust fund recovery penalty

Section 2303 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 [section]5.17.7.1(3)). 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...