Trust Fund Penalty

What is Trust Fund Penalty

The term “Trust Fund” has a different meaning when applied to employment tax rather than to wealth management. A Trust Fund is the payroll tax amount assessed to the officers of the business. When the IRS refers to a trust fund in terms of a business, they mean the funds recovered from the taxes withheld from employees for which the employer is responsible for depositing into their federal tax deposit. These are called trust fund taxes because the employer holds the money in trust until it is deposited. A Trust Fund Penalty is enforced when taxes are held by the employer, but not used for the taxes for which they are intended. Tax resolution can help reduce and/or arrange the payment of these taxes. 

What is a Trust Fund Recovery Penalty (TFRP)?

A Trust Fund Recovery Penalty can be assessed if the unpaid trust fund taxes cannot be immediately collected from the business. Although the business collected the taxes, it failed to deposit them with the IRS for some reason. According to International Revenue Code 6672(a), the individual responsible for the collection and deposit of these taxes can be held liable for penalty for the 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 TFRP?

According to the IRS, the TFRP 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. Even employees can be held responsible. If you know these payments are not being collected, you could be held responsible.

How Does the Trust Fund Recovery Penalty Work?

Once the IRS believes you or your business is liable for penalty, they send a notice that they are planning to assess a TFRP. 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 against you, 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.  Consequently, this amount can be staggering and even detrimental to you and your business. For example, if 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. Multiply this amount by the number of other employees for whom their taxes were not collected and deposited and 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.  If you feel that you may be liable for TFRP or you have received notice from the IRS that they are assessing a TFRP against you, then you need to explore options to appeal the penalty.

Next Steps:

A Trust Fund Recovery Penalty is often stressful for all responsible parties and businesses involved. There are a number of ways to successfully resolve this situation. Contact us for help if you feel that you may be liable for TFRP, have received notice from the IRS that they are assessing a TFRP against you, or you just want to avoid the hassle of this responsibility altogether. Give us a call today to receive a free consultation or visit our IRS problem resolution page for more information.

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