Trust Fund Penalties are fines and fees imposed by the IRS on businesses, or, as we discussed in our previous blog post, Employment Tax: Trust Fund Penalty Assessment, responsible and willfully neglectful members of the business that did not properly pay the business’s Trust Fund Taxes. Trust Fund Taxes are the taxes that a business is required to withhold and match on behalf of their employees. These Trust Fund Taxes are made up mostly of Medicare taxes and Social Security taxes, and are sometimes also referred to as payroll taxes or employment taxes.
If you’re new to the subject, you can learn more about employment taxes, like what they are and what the differences are between employment taxes and self-employment taxes, by viewing the beginning of our Employment tax blog series here: What is Employment Tax?
In this blog post, we’ll build on our previous blog post, Employment Tax: Trust Fund Penalty Assessment, and dive a little deeper into the process following a Trust Fund Penalty Assessment.
The Trust Fund Penalty Assessment Process
If the IRS has found that a business has failed to pay its Trust Fund Taxes on time or in an insufficient amount, they will look to assess responsibility and willfulness. To assess this responsibility and willfulness, the IRS will look to conduct a Trust Fund Penalty Assessment Interview with any members of the business it views as potentially accountable. This is sometimes also known as a 4180 Interview, since the IRS representative will conduct the interview using Form 4180, the Report of Interview With Individual Relative to Trust Fund Recovery Penalty.
As of October 21, 2020, according to the IRS, responsibility can be determined “based on whether an individual exercised independent judgment with respect to the financial affairs of the business.” Meaning that an employee doing as directed by a superior is not held responsible in the eyes of the IRS, while the superior might be, unless they were also directed to do so.
Since one of the main reasons a business might not be able to pay these Trust Fund Taxes in the proper amount or in a timely manner is because they used the funds to pay for something else, the IRS included that scenario in their example of willfulness, stating that “using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.” So, unfortunately, even if a business has fallen on hard times and needs to borrow money from other sources, like withholdings, that’s not a good enough reason for the IRS, and may actually be evidence of willfulness.
Avoiding the The Trust Fund Penalty Assessment Interview
Fortunately, there are ways to avoid the The Trust Fund Penalty Assessment Interview and mitigate the Trust Fund Penalty!
If you, your business, or someone you know is struggling with the Trust Fund Penalty process, check out our Trust Fund Penalty Assessment Interview page to learn more or call us today to get help!
In our next blog posts, we’ll discuss what a Collection Due Process is and what it means for your business.
IRS – Employment Taxes and the Trust Fund Recovery Penalty (TFRP): https://www.irs.gov/businesses/small-businesses-self-employed/employment-taxes-and-the-trust-fund-recovery-penalty-tfrp