Sep 26, 2022
If you are a business owner with employees, you are responsible for withholding a portion of their paychecks to cover Medicare and Social Security contributions. You may also be required to withhold some income tax. These funds are called trust fund taxes, and you must forward that money to the IRS. Failure to do so may result in a Trust Fund Recovery Penalty. Let’s talk a little about what this means and what you need to do to solve it!
The Trust Fund Recovery Penalty, or TFRP, is the penalty you will face if you withhold trust fund taxes from your employees’ checks but do not pass that money on to the IRS. This is a significant penalty and one that the IRS takes particularly seriously. It is common for the IRS to aggressively pursue the collection of TFRP once assessed, even going so far as seizing your personal assets to recover their loss. If you find yourself facing a TFRP, it is wise to seek tax debt professional assistance to resolve the issue.
The TFRP penalty can be levied against anyone who collects or oversees the collection of the trust fund taxes for their organization’s employees and fails to pay it to the IRS. There are many different individuals whom the IRS could pursue, including but not limited to the following:
In simpler terms, anyone in the organization involved in collecting, overseeing, or responsible for paying trust fund taxes could be held personally accountable, even employees in some cases! And the IRS is not just limited to assessing one person within or around an organization; they will seek to levy the TFRP assessment against any and all parties involved.
There are some parameters the IRS must adhere to for someone to be held personally liable. The IRS has to prove that each individual they propose to assess for the TFRP personally was “willful and responsible”. The “willful” aspect of this requirement means that the person understood the company’s tax obligations and was involved with the decision not to turn the withheld monies over to the IRS. The “responsible” portion of the requirement means that the person fulfilled a position or role within the organization that should understand the business’ tax obligations.
An example might be if the Internal Bookkeeper for the business oversaw money being deducted from employee paychecks correctly. Instead of ensuring those monies were turned over to the IRS, the Bookkeeper decided to use the funds to pay invoices for materials used by the company. This indicates an awareness of the need to collect trust fund taxes but an intentional decision not to pay the money to the IRS.
The IRS must fully investigate the accrual of past-due employment taxes to identify who could be considered for the TFRP assessment. This investigation includes the summonsing of bank records, reviewing copies of the quarterly payroll taxes submitted, and conducting one-on-one interviews beginning with the owner(s) of the company and extending out to all parties who could be considered liable based on the evidence compiled. The sole purpose of the investigation is to gather sufficient proof of the person(s) who should be held “willful and responsible” for the trust taxes not being paid to the IRS.
If you are notified about a Trust Fund Recovery Penalty investigation, it is not something you can ignore and hope for the best! The same applies to any type of tax debt, but a TFRP, in particular, is a severe penalty. The psychology behind the IRS’ substantiation for aggressive pursuit of the TFRP process is that those funds were the employee’s, and you were only to hold them “in trust” to turn over to the Federal Government.
The amount of the penalty is by no means small. It is equal to the amount of unpaid trust fund taxes for Social Security contributions, Medicare, and Income Tax. Those deductions can add up each quarter. If an employee earns $1000, you may withhold approximately $175 in trust fund taxes. If you fail to pay that to the IRS, the business will not only owe the back taxes plus penalties and interest, but you will also have a TFRP penalty assessed against you. That may be manageable for just one employee, but if you handle payroll for multiple employees, those back taxes will increase quickly, resulting in substantial tax debt and a hefty penalty.
If you have received a TFRP assessment, the big question is likely to be, ‘how am I going to settle this?’. It is important to remember that this is a tax debt liability, which means that you have options available to settle it. Even if you cannot make the payment in full, you can request a payment plan or installment agreement. It may also be possible to agree on an offer in compromise, depending on your situation. Working with an experienced tax debt solutions provider is the best way to find the most appropriate resolution and get your finances back on track. The important thing is that you take action and don’t try to ignore it in the hope of it going away.
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