IRS Civil Penalty 6672 and 6721
IRS Civil Penalties Associated with Payroll TaxThe two IRS Civil Penalties that we see while resolving 941 Payroll tax cases are the IRC 6672 and IRC 6721 Penalties. Although the penalties are assessed for very different reasons, each can be devastating to a business and the business owner(s). And, each has its own distinct solutions.
IRC 6672 Civil Penalty
The Civil Penalty assessed under Internal Revenue Code 6672 for failure to pay employment taxes, starts out as the Trust Fund Recovery Penalty (TFRP) portion of the business payroll debt. Prior to being assessed to the Responsible Individual(s) of the delinquent business, this tax is often referred to simply as the Trust Fund. Once the TFRP is assessed to the individual(s), it is called a Civil Penalty. It is often abbreviated on IRS notices as CivPen.
Throughout the process, I had a high level of confidence that this would be resolved effectively, and that my company's interests were protected. The communication between M&M and myself was a high priority for me, and this was done very well.
4180 Trust Fund InvestigationA local IRS Revenue Officer assigned to collect the business employment tax debt is charged with conducting the Trust Fund Investigation and assessing it to the persons willful and responsible for withholding and paying over the payroll tax to the IRS on behalf of the business.
Trust Fund Recovery Penalty - TFRPThere are several Trust Fund Recovery Penalty Solutions available to resolve the tax liability for both the business and the individual(s) held responsible. And if the IRS is attempting to assess the Trust Fund to an employee of the business that should not be held personally responsible, you may submit a Protest of the Proposed Trust Fund Assessment.
IRC 6721 Penalty
The Civil Penalty we see assessed to our business clients under Internal Revenue Code 6721 is for failure to file W2/W3 forms with the Social Security Administration (SSA). Unlike the 6672 Penalty, this one cannot be transferred from the business to an individual.
The IRS matches their employment tax records with the SSA W2 records. 941 tax return totals for a given year should match the totals of all the W2 forms for the same year. When the total figures on the four 941 returns add up to more than the W2 totals and the business taxpayer fails to timely respond to notices requesting updated information, a Civil Penalty is assessed against the business.
IRS 941 and W2 MatchingIt may take the IRS a few years to match records with the SSA. So a business owner typically won't be notified that there are issues until years have passed. If you receive notices regarding missing W2's from the SSA or IRS, respond accordingly by the deadline given. We also recommend checking on subsequent years to make sure that you don't run the risk of more Civil Penalties down the road.
Because the total Civil Penalty is a sum of the penalties charged for each missing W2, it can get out of control really quickly. If your business has a lot of employees and you fail to file your W2's, the potential damage can be enormous. It's possible for the IRS to assess this penalty for over $1M. It is also possible to request abatement of the IRS 6721 Civil Penalty.