What Is a DPN (Trust Fund Recovery Penalty)?
Unpack the IRS DPN: a federal penalty holding individuals personally accountable for a business's unremitted employee payroll taxes. Understand its implications.
The Trust Fund Recovery Penalty (DPN) is a measure used by the Internal Revenue Service (IRS) to ensure the collection of specific federal taxes. This penalty is assessed against individuals who are responsible for collecting, accounting for, and paying over certain federal taxes but willfully fail to do so. Its purpose is to recover taxes employers withhold from employee wages, which are held in trust for the U.S. Treasury.
Identifying a Responsible Person
Determining who qualifies as a “responsible person” for DPN purposes extends beyond official job titles within an organization. The IRS considers an individual’s authority and control over the business’s financial operations and tax obligations, including the power to direct creditor payments, sign checks, or make financial disbursements.
Factors the IRS evaluates include access to company records, duties as an officer, director, or employee, and the ability to control the business’s financial affairs. Corporate officers, board members, or employees with significant financial authority may be deemed responsible. The IRS can hold multiple individuals responsible for the same unpaid taxes, as each responsible person is jointly and severally liable.
Understanding Trust Fund Taxes
“Trust fund taxes” refer to specific federal taxes employers withhold from employees’ wages, including federal income tax, Social Security, and Medicare taxes (FICA). These funds are not the employer’s property; they are held “in trust” by the employer for the U.S. Treasury.
Unlike the employer’s share of FICA or federal unemployment taxes (FUTA), trust fund taxes are specifically subject to the DPN because they represent money collected from employees. Employers have a legal obligation to hold these funds in trust and remit them to the IRS. The concept of “willfulness” means the failure to pay must be a conscious, voluntary, and intentional act, or a reckless disregard for the obligation, rather than an accidental oversight. This applies even if the intent was to pay other business expenses instead of the taxes.
Assessment and Notification Process
The IRS initiates the DPN process with an investigation to identify potentially responsible individuals. This often involves a revenue officer contacting the business and conducting interviews. The IRS may review bank statements, corporate documents, and payroll records to determine who had control over financial decisions.
Following the investigation, if the IRS determines an individual is responsible and acted willfully, they will issue IRS Letter 1153. This letter informs the individual of the proposed penalty amount, the specific tax periods involved, and their right to appeal. Along with Letter 1153, individuals typically receive Form 2751, which signifies the proposed penalty.
Recipients of Letter 1153 generally have 60 days to respond and appeal the proposed penalty, though this period can extend to 75 days if the letter is addressed outside the U.S. Failure to respond within this timeframe can lead to the formal assessment of the DPN. During the investigation, the IRS may also use Form 4180 as a questionnaire to gather information about an individual’s role and knowledge of the unpaid taxes.
Responding to a DPN
Upon receiving a proposed DPN, individuals have specific avenues to address the assessment. A primary step involves exercising appeal rights, which generally allows 60 days from the date of IRS Letter 1153 to file a written protest with the IRS Office of Appeals. This appeal process offers an opportunity to present arguments and evidence to an independent IRS appeals officer, disputing responsibility or willfulness.
If the DPN is upheld or not appealed, various payment options exist. These include making full payment of the penalty. Alternatively, individuals might arrange an installment agreement to pay the balance over time, or, if eligible, propose an Offer in Compromise (OIC) to settle the tax debt for a lower amount. Streamlined installment agreements are available for balances up to $50,000, allowing payment over a period, typically 72 months, without extensive financial disclosure, provided certain conditions are met.
Should the DPN remain unpaid, the IRS may initiate collection actions against the individual’s personal assets. These actions can include filing tax liens, which secure the government’s claim against property, or issuing levies to seize bank accounts or wages. Given the personal financial implications, timely action and seeking professional advice from a tax attorney or qualified financial professional are important steps.