Trust Fund Penalty Assessment
What is a Trust Fund Recovery Penalty Assessment?
The IRS implements a Trust Fund Recovery Penalty Assessment to encourage business owners to pay their employment taxes. A small business owner may be tempted to tap into the tax funds that they collected from their employees to stay afloat. Unfortunately, this action has dire consequences. Taxes collected from employees are called trust fund taxes because that money is held in trust until you deposit it with the IRS. When an employer fails to deposit their employees tax funds, they may have a penalty assessed against them.
A Trust Fund Recovery Penalty is Assessed Against Whom?
Typically it is the employers’ responsibility to manage the trust fund and forward those funds to the IRS on behalf of the employee. When the IRS does not receive these funds, Congress authorizes Revenue Agents to go out to assess and attempt to collect those unpaid taxes. The Trust Fund Recovery Penalty is equal to 100% of the unpaid taxes.
Will Business Owners Be The Only Ones Assessed?
No. The IRS will assess the penalty against anyone they believe had a part in the non-payment of the trust fund taxes. If the IRS believes an individual “willfully” withheld trust fund taxes, they will be assessed the penalty. For willfulness to exist, the responsible person must have been, should have been or was aware of the outstanding taxes. Once they were aware of these taxes, they either intentionally disregarded the law or were plainly indifferent towards the requirements. Sometimes, the IRS will impose it against those who had no knowledge or control in the disbursement of the funds. In order to be liable and possibly assessed, you must have had a duty to collect and pay taxes, but willingly refused to do perform that duty.
Can The IRS Impose The Penalty On More Than One Person?
Yes. The penalty will remain owed against everyone deemed responsible until it is paid off by one or more the parties. If you have limited resources, the IRS is not supposed to include you in this assessment. Unfortunately, this requirement is often overlooked. Therefore, it is essential to have a knowledgeable person fill out a collection information statement on your behalf.
Examples of a responsible person or group of people:
- An officer or employee of a company
- A member or employee of a partnership
- A corporate director or shareholder
- A member of a board of trustees
- Payroll Service Providers (PSP) or responsible parties within PSP
If the IRS determines that you are the person responsible for the failure to pay Trust Fund Taxes, they will send you a letter stating that they plan to assess the TFRP (Trust Fund Recovery Penalty) against you. You then have 30 days from the date of the letter to appeal their proposal. The letter will explain the rights you have to appeal. If you do not respond to their letter, they will assess the penalty against you and send a Notice and Demand letter.
How Can You Avoid The TFRP?
The Trust Fund Recovery Penalty can be avoided by ensuring that all employment taxes are collected, accounted for and then sent to the IRS for payment when required. Make sure these payments are on time and accurate. If you do this correctly, you will avoid any assessment by the IRS.
Withholding trust fund taxes from the IRS can lead to heavy fines for any party involved. Not only are you hurting the IRS, you could also be significantly harming your employee(s) by not following through with their tax withholding. If you have any questions or concerns about any TFRP situation, feel free to contact us.
See more information at our IRS tax resolution services.