As we discussed in the previous blog post in the series, Employment Tax: Trust Fund Penalty, a Trust Fund Penalty is associated with ‘Trust Fund Taxes,’ sometimes known as employment taxes or payroll taxes. These ‘Trust Fund Taxes’ specifically refer to the taxes a business is required to withhold and match on behalf of their employees. These withheld taxes are the contributions to Social Security taxes and Medicare taxes that a business also matches for its employees and then pays to the IRS in the form of a federal tax deposit. A business will be assessed a Trust Fund Penalty if it does not pay these taxes to the IRS by the correct time or in the correct amount.

If this is a bit confusing so far, check out the previous post on Trust Fund Penalties to get caught up!

In this post, we’ll discuss the terms under which the IRS will assess this Trust Fund Penalty, also known as the Trust Fund Recovery Penalty (TFRP), and who the IRS will hold responsible.

Criteria for a Trust Fund Penalty Assessment

There are two major factors when it comes to Trust Fund Penalty Assessment: responsibility and willfulness. According to the IRS, as of October 21, 2020, the Trust Fund Penalty can be assessed against anyone who:

  • “Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
  • Willfully fails to collect or pay them.”

What this means is that the Trust Fund Penalty can be assessed against the people in the business who were responsible for handling the Trust Fund Taxes. But it also requires that the person willfully failed to pay these taxes. We’ll cover what the IRS defines as ‘willful’ and who it defines as ‘responsible’ next.

Trust Fund Penalty Assessment: Responsibility and Willfulness

As of October 21, 2020, the IRS defines a ‘responsible’ person as “a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.” In general, this means that if a person is, in some way, involved in or in charge of the finances, accounting, collection or payroll, the IRS could view them as someone eligible for a Trust Fund Penalty. But, as we mentioned above, willfulness to not pay these Trust Fund Taxes must also be determined.

According to the same IRS page about Employment Taxes and the Trust Fund Recovery Penalty (TFRP), for the IRS to determine willfulness, a person:

  • “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).”

While willfulness may seem harder to prove than responsibility, the next step in the Trust Fund Penalty Assessment is the Trust Fund Penalty Assessment Interview, during which the IRS will attempt to determine whether a person is responsible and acted willfully or not.

If you, your business or your colleagues are in any of the stages of a Trust Fund Penalty Assessment, give us a call today! For a full list of who can be held responsible for Trust Fund Penalties, visit our Trust Fund Penalty Assessment page to learn more.

In our next blog post, Employment Tax: Trust Fund Penalty Assessment Interview, we’ll discuss the Trust Fund Penalty Assessment Interview and the next steps the IRS taxes during a Trust Fund Penalty Assessment.

Sources

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

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