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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

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. This action has dire consequences. 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.

Officer
Officer

Will Business Owners Be The Only Ones Getting Assessed?

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

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

Yes. The penalty 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 this assessment. This requirement is often overlooked unfortunately. That is one reason why it is essential to have a knowledgeable person fill out a collection information statement on your behalf.

Examples of a responsible person or group of people:

If the IRS determines that you are the person responsible for the failure to pay Trust Fund Taxes, they will send you a letter stating that they plan to assess the TFRP (Trust Fund Recovery Penalty) against you. You then have 30 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 letter.

How Can You Avoid The TFRP?

The Trust Fund Recovery Penalty can be avoided by ensuring 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 by the IRS.

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

 

See more information at our IRS tax resolution services.

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