Trust Fund Penalty Assessment

What is a Trust Fund Recovery Penalty Assessment?

A Trust Fund Recovery Penalty is implemented by the IRS to encourage business owners to pay their employment taxes. When someone owns a small business and they fall on hard times, they may feel tempted to tap into the tax funds that they collected from their employees to stay afloat. Taxes collected from employees are called trust fund taxes because that money is held in trust until you deposit it to the IRS. When an employer fails to deposit their employees tax funds, they may have a penalty assessed against them.

Who Is A Trust Fund Recovery Penalty Assessed Against?

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 Getting Assessed?

No, they will assess against anyone they believe had a part to play in the non-payment. If the IRS believes an individual “willfully” withheld trust fund taxes they will be assessed. For willfulness to exist the responsible person must have been, should have been or was aware of the outstanding taxes. Once they were aware they either intentionally disregarded the law or plainly was indifferent towards the requirements. They will sometimes even impose it against those who had no knowledge or control in where the funds were going. In order to be liable and possibly assessed, you must have had a duty to collect and pay taxes, but willingly refused to do so.

Can The IRS Impose The Penalty On More Than One Person?

Yes the debt 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 assessment. This requirement is often overlooked unfortunately and is the reason why it is essential to have someone fill out a collection information statement who will work 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 a responsible person, they will provide you with a letter stating that they plan to assess the TFRP (Trust Fund Recovery Penalty) against you. You then have 60 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.

How Can You Avoid The TFRP?

Simply by making sure 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 the IRS would have made against you or your company.

Next Steps:

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 by not following through with their tax withholding. If you have any questions or concerns about any TFRP situation feel free to contact us.

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