Trust Fund Penalty
What is Trust Fund Penalty
The term “Trust Fund” applies to wealth management rather than employment taxes for most people. To clarify, a Trust Fund is the payroll tax amount assessed to the officers of the business. When the IRS refers to a trust fund, they mean the funds recovered from the taxes withheld from employees. In other words, the employer is responsible for depositing these funds into their federal tax deposit. As a result, these are called trust fund taxes because the employer holds the money in trust until it is deposited. Consequently, a Trust Fund Penalty is enforced when taxes are held by the employer, but not used for the taxes for which they are intended. This action is illegal and can result in steep interest and penalties. Thus, tax resolution can help reduce and/or arrange for the payment of these taxes.
What is a Trust Fund Recovery Penalty (TFRP)?
A Trust Fund Recovery Penalty is assessed if the unpaid trust fund taxes cannot be immediately collected from the business. Even though a business collected these taxes, it failed to deposit these taxes with the IRS for some reason. Moreover, the individual responsible for the collection and deposit of these taxes can be held liable for penalty. This penalty is for the willful failure to collect, account for, or pay to the IRS these taxes. This is in accordance to International Revenue Code 6672(a).
Who is Responsible for the TFRP?
According to the IRS, the TFRP is assessed against any person who is:
- Responsible for collecting or paying withheld employment taxes
- Willfully fails to collect or pay the taxes
Two requirements:
The IRS investigates the circumstances regarding the failure to pay trust fund taxes. They review documents and interview all possible responsible persons. Then, they determine who is responsible for the failure of payment of the taxes. Next, they send Notices conveying their intent. Persons being interviewed by the IRS need an experienced tax professional present. An innocent, but incorrect statement, can be disastrous.
A responsible person is:
- An officer or an employee of a corporation whose duty is to collect and pay the tax
- A member or employee of a partnership, whose duty is to collect and pay the tax
- A corporate director or shareholder whose duty is to collect and pay the tax
- A member of a board of trustees of a nonprofit organization
- Another person with authority and control over funds to direct their disbursement
- Another corporation or third-party payer
- Payroll Service Providers (PSP) or responsible parties within a PSP
- Professional Employer Organizations (PEO) or responsible parties within a PEO
- Responsible parties within the common law employer (client of PSP/PEO)
Willfulness is:
- Must have been, or should have been, aware of the outstanding taxes and
- Either intentionally disregarded the law or was plainly indifferent to its requirements
- No evil intent or bad motive is required
In essence, anyone responsible for collecting these funds is potentially liable. Furthermore, even employees can be held responsible. Moreover, if you know these payments are not being collected, you could be held responsible.
How Does the Trust Fund Recovery Penalty Work?
The IRS will send a notice that they are planning to assess a TFRP if they believe you or your business is liable for the penalty. In addition, you will have 60 days to appeal. However, if you do not respond to the letter with an appeal, the IRS will send you a Notice and Demand for Payment. Once the penalty is assessed, the IRS can take collection action against all responsible parties.
How Much is a Trust Fund Recovery Penalty?
The IRS will seek to collect all employment taxes collected but not deposited from each employee’s paycheck. This includes Social Security, Medicare, income taxes and even self-employment/contractor taxes. Consequently, this amount can be staggering and even detrimental to you and your business. Suppose one employee owes $1,000 for each paycheck in withheld taxes which were not deposited for one year. The fee can be as much $12,000 for just that one employee. Moreover, this amount does not include interest and penalty charges. Then multiply this amount by the number of other employees for whom their taxes were not collected and deposited. That amount plus penalty and interest can amount to a “small fortune” being owed to the IRS.
How Do I Avoid a Trust Fund Recovery Penalty?
In conclusion, the best way to avoid a penalty is to collect and deposit employment taxes in a timely manner. Furthermore, you need to explore options to appeal a TFR penalty if either of the following is true:
- you may be liable for a TFRP or
- you have received notice from the IRS that they are assessing a TFRP against you
Next Steps:
A Trust Fund Recovery Penalty is often stressful for all responsible parties and businesses involved. However, there are a number of ways to successfully resolve this situation. Contact us for help if you:
- are liable for the TFRP,
- have received notice from the IRS that they are assessing a TFRP against you
- just want to avoid the hassle of this responsibility altogether.
Above all, give us a call today to receive a free consultation or visit our IRS problem resolution page for more information.