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Part 8. Appeals

Chapter 25. Trust Fund Recovery Penalty (TFRP)

Section 1. Trust Fund Recovery Penalty (TFRP) Overview and Authority

8.25.1  Trust Fund Recovery Penalty (TFRP) Overview and Authority

8.25.1.1  (10-19-2007)
Trust Fund Recovery Penalty (TFRP) Overview

  1. This IRM Chapter 8.25.1 addresses the legal requirements and process for handling TFRP cases.

    1. The Revenue Officer must establish responsibility and willfulness, and determine collectibility when determining whether to proceed with recommending the assertion of the TFRP. Further discussion on Collection responsibilities is found in IRM 8.25.2.

    2. If a proposed TFRP case is appealed, Appeals is responsible for determining if the party is willful and responsible for the TFRP and is the sole function that may make the final administrative determination with respect to the taxpayer's protest.

    3. Appeals Processing Service (APS) provides technical assistance and support for controlling cases in Appeals. Further discussion of APS responsibilities can be found in IRM 8.25.3.

  2. The trust fund recovery penalty is not a penalty in the usual sense. The TFRP is based on IRC 6672and is used to facilitate the collection of tax and enhance voluntary compliance. It serves as an alternative means of collecting unpaid trust fund taxes when taxes are not fully collectible from the company/business that failed to pay the taxes. Congress enacted IRC 6672 to encourage prompt payment of withheld and other collected taxes and to ensure the ultimate collection of the taxes from a secondary source.

8.25.1.2  (10-19-2007)
Trust Fund Recovery Penalty (TFRP) Authority

  1. The Trust Fund Recovery Penalty (TFRP) is a penalty against any person required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities. The TFRP may be imposed for:

    • Willful failure to collect tax

    • Willful failure to account for and pay over tax

    • Willful attempt in any manner to evade or defeat tax or the payment thereof.

  2. The Trust Fund Recovery Penalty (TFRP) under IRC 6672 is equal to the total amount of tax evaded, not collected, or not accounted for and paid over.

  3. Trust fund recovery penalties are generally excepted from discharge because they are entitled to priority status. See 11 U.S.C. 523(a)(1). However, the exceptions to discharge do not apply to Chapter 13 cases filed before October 17, 2005.

    1. In Chapter 13 cases filed before October 17, 2005, trust fund recovery penalties were dischargeable if they were provided for in the Chapter 13 plan and the debtor successfully completed the plan.

    2. For Chapter 13 cases filed on or after October 17, 2005, trust fund recovery penalties are excepted from discharge whether or not they are provided for in the plan or included on a timely filed proof of claim. See 11 U.S.C. 1329(a) and 523(a)(1).

    Note:

    For additional information, see IRM 5.9, Bankruptcy Handbook.

  4. The Service’s policy on assertion of the trust fund recovery penalty is in Policy Statement P-5-60, IRM 1.2.1,Policies of the Internal Revenue Service.

8.25.1.2.1  (10-19-2007)
Changes in Procedures Due to the Taxpayer Bill of Rights 2

  1. If the taxpayer timely protests a proposed TFRP, the assessment period will be extended until the date that is 30 days after Appeals makes its final determination with respect to the protest.

  2. A protest is timely if it is mailed on or before the 60th day (75th day if the letter was addressed outside the United States) after the mailing or personal delivery of Letter 1153. This gives the taxpayer a full 60 days (75 days if the letter was addressed outside the United States) to respond to Letter 1153. Collection is expected to wait until the 65th day to make any assessment to allow for mail time of a protest

  3. Appeals is the sole function that may make the"final administrative determination" for purposes of IRC 6672(b)(3)(B).

  4. To ensure that the statute is protected on these cases, Appeals will not release jurisdiction before the case is resolved, e.g. Appeals will not release jurisdiction on premature referrals. This rule does not apply in cases where the IRC section 6501 statute has been extended, and there is no statute expiration concern. If Appeals needs to retain jurisdiction, prepare an ARI, for further development or some other reason. Collection should take the necessary action in 45 days. This 45 day period can be extended through mutual agreement of both functions.

  5. After filing a timely protest with Collection, a taxpayer will have 45 days, or any longer period Collection agrees to, to perfect any defects in the protest. After the end of 45 days (or any longer period agreed to), the taxpayer’s case is to be sent to Appeals even if it is imperfect. Appeals will give the taxpayer an opportunity to provide any missing information. This is to ensure that any taxpayer who wishes to appeal will have the opportunity to do so.

  6. When a taxpayer withdraws a timely protest, Appeals will sustain the proposed liability in it’s entirety. The date the Appeals Team Manager signs the customized Form 5402 sustaining the liability constitutes the "final administrative determination" for purposes of IRC 6672(b)(3)(B).

  7. IRC 6103(e)(9) provides for disclosure of information where more than one person is held liable for the trust fund recovery penalty. Once a person is determined to be liable then, upon their written request, the Service may disclose, in writing, the name of any other person determined to be liable, whether the Service has attempted to collect the penalty from the other liable person, the general nature of the collection activities and the amount collected.

    1. A person is determined to be liable for purposes of IRC section 6103(e)(9) when that person is assessed. Therefore, no disclosure is permitted until after the person is assessed.

    2. If Appeals receives a disclosure request with ONLY a request for the names of liable persons, the written request may be responded to once an assessment is made. Appeals should make no disclosures concerning the collection actions, since we are not in a position to know everything that may have occurred. Refer those requests to Disclosure or Collection function

    3. Also do not disclose names on any pending cases, since disclosure is only permitted TO ASSESSED trust fund recovery penalty persons ABOUT ASSESSED trust fund penalty cases. These IRC 6103(e)(9)disclosures are permissible to the assessed responsible officer or their attorney-in-fact. (Normally, this would be a person given a Power of Attorney by the responsible person in order to practice before the Service relative to the TFRP issue).

8.25.1.3  (10-19-2007)
Collection Responsibility

  1. The Collection function has sole responsibility for recommending assertion of the trust fund recovery penalty. Examination function personnel may refer potential trust fund recovery penalty cases to Collection for investigation. For additional information, see IRM 5.7, Trust Fund Compliance.

  2. Before a Trust Fund Recovery Penalty is assessed, taxpayers are mailed or hand delivered a 60-Day Notice of Proposed Assessment, Letter 1153. Letter 1153 advises taxpayers of the proposed penalty and of their appeal rights.

    1. If the taxpayer agrees with the proposed penalty, he/she will return a signed Form 2751, Proposed Assessment of the Trust Fund Recovery Penalty.

    2. If the taxpayer disagrees, he/she may discuss the proposed penalty with the revenue officer’s group manager or file a written protest.

  3. The taxpayer has 60 days in which to file a timely protest (75 if the letter was addressed outside of the United States). A protest is considered timely if it is mailed on or before the 60th day, (or 75th if outside of the United States) i.e., timely mailed is timely filed. The 60 day period is measured from the mailing date of the Letter 1153, or from the delivery date if Letter 1153is delivered in person.

  4. A timely mailed protest is still timely for purposes of IRC 6672(b)(3)(B) even if the protest is inadequate.

  5. Most trust fund recovery penalty cases that are considered by Appeals are pre-assessment. Appeals may receive post assessment trust fund recovery penalty claim cases also.

  6. For additional discussion in working TFRP claim cases, refer to IRM 8.25.2.

8.25.1.3.1  (10-19-2007)
Definition of a Responsible Person

  1. A "responsible person" is one who has the duty to perform or the power to direct the act of collecting, accounting for, or paying over trust fund taxes. When evaluating responsibility, consider the Supreme Court decision in Slodov v. United States, 436 U.S. 238, 78-1, USTC 9447 (1978). See also IRM 5.7.3Establishing Responsibility.

  2. Most trust fund recovery penalty cases involve officers of corporations. However, a responsible person may be one or more of the following:

    1. an officer or employee of a corporation

    2. a member or employee of a partnership

    3. a corporate director or shareholder

    4. a related controlling corporation

    5. a lender, a surety, or any other person with sufficient control over funds to direct disbursement of the funds, or

    6. in some cases, a person assuming control after accrual of the liability.

  3. In each situation, determine who had a duty to see that taxes were withheld, collected, or paid over to the government at the specific time the failure occurred. There can be more than one responsible person.

8.25.1.3.2  (10-19-2007)
Definition of Wilfulness

  1. The trust fund recovery penalty is a civil penalty; so the degree of willfulness in failing to collect or pay over any tax leading to liability for this penalty is not as great as that necessary for criminal proceedings. "Willful" is defined as intentional, deliberate, voluntary, and knowing, as distinguished from accidental. "Willfulness" is the attitude of a responsible person who with free will or choice either intentionally disregards the law or is plainly indifferent to its requirements. See IRM 5.7.3Establishing Wilfulness.

  2. Appeals employees must determine if the actions of a responsible person who permits funds withheld as tax to be used to pay operating expenses of the business are willful. Were the person’s explicit or implicit directions willful to a degree sufficient to make the person liable for the trust fund recovery penalty. There is no need to show that a responsible person had any evil intent or desire to defraud the Government of the withheld taxes. When determining willfulness, Appeals officers must research the large body of Court decisions on this topic.

8.25.1.4  (10-19-2007)
Mediation and Arbitration

  1. Post-Appeals Mediation takes place while the TFRP is under Appeals' jurisdiction, which means the written request for mediation must be made before the case is closed by Appeals. Post-Appeals mediation procedures are found in Rev. Proc. 2002-44. Arbitration procedures are found in Rev. Proc. 2006-44. Appeals is presently addressing both post-Appeals mediation and arbitration requests on a case-by case basis. If an AO/SO receives a written request for post-Appeals mediation, contact the TFRP Program Analyst for Appeals Tax Policy and Procedure.

  2. TFRP cases are eligible for Fast Track Mediation (FTM). Fast Track Mediation takes place while the TFRP is still under Collection's jurisdiction. This program is designed to expedite case resolution. Collection provides the taxpayer with Publication 3605, Fast Track Mediation, a Process for Prompt Resolution of Issues. FTM mediation has no impact on the ASED, i.e., FTM does not extend the ASED. Both Collection and the taxpayer must agree to mediate the case. If Collection and the taxpayer agree to mediate, the Revenue Officer will complete Form 13369 an "Agreement to Mediate" and a "Summary of Issues" . The Revenue Officer will send the forms to Appeals within 3 days of securing the signed Agreement from the taxpayer. Mediators (Appeals employees) will conduct the session, however, they will not have settlement authority. Both parties (Collection and the taxpayer) must agree in order to reach a resolution.

  3. Jurisdiction and statute of limitation responsibility remainswith Collection, therefore, the case file is not forwarded to Appeals. Local Appeals and Collection Offices will work their own procedures for prompt transmittal of cases to the local Appeals office. Collection will send a copy of the Agreement to Mediate to the taxpayer and/or representative.

    1. The mediator will attempt to schedule the mediation session with the taxpayer and/or taxpayer's representative and collection within 5 business days after the case is assigned to Appeals

    2. The mediation begins with an initial joint discussion where all parties are present

    3. Both the taxpayer and Collection will be given time to present their position

    4. After the initial joint discussions, the mediator may hold individual discussions with the party

    5. At any time, either party may withdraw from the process prior to reaching a resolution by notifying the other party and the mediator in writing.

  4. The entire process may take 30 - 40 days to complete. If the mediation cannot be held within a reasonable amount of time, the mediator may return the case. The mediator will attempt to bring the parties to a mutual resolution of the issues during the mediation session. If, after a reasonable time, it is apparent that the parties will not reach resolution, the mediator will terminate the mediation session and return the case to Collection.

  5. For additional information, refer to Rev. Proc. 2003-41, and SB/SE Fast Track Mediation Procedures.

    Note:

    Mediation of a TFRP case is done before the administrative Appeal of Letter 1153.

8.25.1.5  (10-19-2007)
TFRP Recording Requirements

  1. IRC 7521, which was part of the Taxpayer Bill of Rights 1 (TBOR1), provides for audio recordings by the taxpayer upon advance notification

  2. Appeals will allow audio recordings on all types of cases that have face-to-face conferences on issues not deemed frivolous. In all such cases, the taxpayer must follow the requirements of IRC 7521, give 10 days advance notice, and provide their own recording equipment. The Appeals Employee will also make an audio recording of the conference with IRS equipment.

  3. Procedures for making audio recordings are described in Notice 89-51, 1989-1 C.B. 691.Appeals employees will follow the provisions of that Notice, or its successor, when allowing recordings in cases within Appeals jurisdiction.


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