Trust Fund Penalty

What is Trust Fund Penalty

A Trust Fund in terms of employment tax should not be mistaken with a trust fund in terms of wealth management. When the IRS refers to a trust fund in terms of a business, they mean the funds recovered from the taxes withheld from employees which the employer is responsible for putting into their federal tax deposit. These are called trust fund taxes because you, the employer hold the money in trust until it is deposited. Trust fund penalty happens when taxes are held.

What is a Trust Fund Recovery Penalty (TRFP)?

A Trust Fund Recovery Penalty can be assessed if the unpaid trust fund taxes cannot be immediately collected from the business. This often happens if the business falls on hard times and taps into that fund for any reason. According International Revenue Code 6672(a) an individual can be held liable for penalty for willful failure to collect, account for, or pay to the IRS the taxes for the business.
Federal Tax Lien
Trust Fund Penalty

Who is Held Responsible for the TRFP?

According to the IRS, the TRFP can be assessed against any person who is:

A responsible person is determined as

Willfulness is determined as:

In essence, anyone responsible for collecting these funds can be held responsible however, employees can be held responsible as well. If you know these payments aren’t being collected you could be held responsible.

How Does the Trust Fund Recovery Penalty Work?

If the IRS believes that you or your business may be liable for penalty, they will begin by sending notice that they are planning to assess a TRFP against you and you will have 60 days to appeal, 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 made, the IRS can take collection action against all responsible parties.

How Much is a Trust Fund Recovery Penalty?

The IRS will collect all employment taxes including Social Security, Medicare, income taxes and even self-employment/contractor taxes that have not been deposited from each employee’s paycheck so depending on the de[th, this amount can be staggering and oftentimes detrimental to you and your business. For example, if one employee owes $1,000 each paycheck in withheld taxes and those taxes have not been deposited for one year, the fee can be as much $12,000 for just one employee’s undeposited employment tax not including interest and penalty charges.

How Do I Avoid a Trust Fund Recovery Penalty?

The best way to avoid a penalty is to collect and deposit employment taxes in a timely manner and consistently however, if you feel that you may be liable for TNRP or you’ve been sent notice there are options to appeal the penalty.

Next Steps:

A Trust Fund Recovery Penalty is often stressful for all responsible parties and businesses involved but there are a number of ways to work this situation out. If you feel you may be liable for TNRP, have received notice that a penalty is being assessed or you just want to make sure that you avoid this all together, we are here to help. Give us a call today to receive a free consultation or visit our IRS problem resolution page for more info.

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