An individual assessed the Trust Fund Recovery Penalty (TFRP) has the option to pay just a portion of the assessment to gain access to a court. This is different from the requirement for income taxes, which calls for payment, in full, of the tax, penalty, and interest, before a court can hear the case.

The TFRP is made up of the unpaid trust fund portion of employment taxes. Employment taxes are considered divisible taxes, meaning the taxes for each employee and each quarter stand on their own. The individual assessed the trust fund portion of taxes withheld from all employees’ wages can pay just the tax for one employee for each quarter and then file a claim for refund to get that payment returned. This is true even when there are hundreds or thousands of employees. The reason to do this is to bring the whole liability into question for as small of a payment as possible. If the IRS denies the claim for refund on the one employee, the assessed individual can sue for a refund of the payment made. The IRS will counterclaim for the balance, bringing the whole amount into question before the court. See Filing a Claim for Refund of Federal Taxes.

The problem is knowing how much to pay for an employee for each quarter. The assessed individual can calculate the exact amount if they have the payroll records. Unfortunately, the assessed individual often does not have access to those records. The perceived solution, often recommended by the IRS, was to pay a nominal amount, for example $100 for an employee in each quarter. The amount and calculation of this nominal payment is what lead to a disastrous result for a taxpayer this past fall in the United States Court of Federal Claims, Kaplan v. United States, 113 Fed. Cl. 84, 112 AFTR 2d ¶2013-5375 ( 2013)

In Kaplan, the IRS assessed a TFRP of about $87,000 against the taxpayer. The taxpayer made three $100 payments toward the penalties for three tax quarters. With each of these payments, he submitted IRS Form 843, Claim for Refund and Request for Abatement, to request that the payments be refunded to him. The IRS denied all of the refund claims. The taxpayer then filed a suit for refund in the United States Court of Federal Claims.

The Court of Federal Claims’ jurisdiction over tax refund suits is subject to the so-called full-payment rule, which generally requires that claimants satisfy a tax liability in full before they commence a refund suit. As explained above, there is an exception to the full-payment rule for a divisible tax assessment, like the TFRP. The question before the Court was whether the taxpayer paid enough to meet this exception.

The taxpayer argued that his estimated payments of $100 satisfied the full-payment requirement. Unfortunately, he extrapolated his number for the entire quarter from the payroll numbers from just one week of the 13 week quarter. The Court found this one week of information was insufficient to make this determination for the other 12 weeks of the quarter. Other evidence showed that the company’s payroll fluctuated too much to make a calculation based on one week reliable. Therefore, the Court stated that it lacked jurisdiction to hear the case.

The lesson from this court is that when you challenge the TFRP through the refund claim/suit procedures, you should do your best to provide evidence that the payment you made for an employee for each quarter accurately represents the amounts withheld or that should have been withheld from that employee’s wages. If you cannot be sure of the amount, you can improve your situation by paying an estimated amount based on the income of the highest paid employee, instead of the lowest paid employee. Even though the payment will be more, it will most likely still be less than paying the obligation in full.