The Trust Fund Recovery Penalty is a measure enacted by Congress to encourage the payment of withheld income and employment taxes which also include social security taxes, collected excise taxes and railroad retirement taxes.
Overall these taxes are called trust fund taxes because employers hold the money of employees in a trust until a federal tax deposit is made. The Trust Fund Recovery Penalty is charged when these trust fund taxes are not promptly paid by a business or individual. One key issue is that the IRS will go after both the company as well as the individual they deem responsible for the payment of the taxes. If you have questions on any aspect of this process, you need to consult with an attorney who understands there rules.
The Trust Fund Recovery Penalty is charged to any person or company who fails to collect or pay the payroll tax payment as well as withheld income and employment taxes. This person or organization has the responsibility of collecting, accounting and paying these trust fund taxes in full and on time.
Typically the Trust Fund Recovery Penalty is charged to the following types of people or organization: An officer of a corporation, a member of a partnership, a corporate director or shareholder, a board of trustees member of a non-profit organization, a person with authority over funds for disbursement, or a third party corporation or payer.
An important consideration before a person is charged with a Trust Fund Recovery Penalty would be willful failure to pay the trust fund taxes (such as any payroll tax). Willful non-disclosure is determined through the following standards: Awareness of the existence of outstanding taxes, intentional disregard of the law (bad motive is not required), or use of available funds not for its purpose.
Once the IRS decides to move ahead with this action, they calculate what they feel the penalty should be. The imposed penalty is equivalent to the unpaid amount of the trust fund tax or a portion of it. This is computed according to the unpaid income taxes withheld and the portion of the withheld FICA payroll taxes of the employees.
If the taxes have been collected already, the penalty is based on the unpaid amount of collected excise tax liabilities.
Upon determination of a successful Trust Fund Recovery Penalty, a notice will be sent informing the subject of Trust Fund Recovery Penalty assessment. There is a 60-day period for an appeal to correct misconceptions, if any. This is where your tax attorney can be very helpful if you feel the Trust Fund Recovery Penalty was filed in error.
Failure to respond to the notice will result in a Demand for Payment. This is not to be taken lightly. The IRS can employ the full reach of the law to make you pay. This can include a bank levy which will freeze your accounts or a federal tax lien which will seize your properties. Again, we can help with this process.
If you want to avoid these problems, then you need to take a number of simple steps. The Trust Fund Recovery Penalty can be avoided by ensuring that employment taxes are collected, accounted and paid to the IRS as required. Pay it promptly and try to approach every payroll tax in a very proactive manner. Accountants of a business or a trust fund should make it clear to employers that they must be aware of any payroll tax deliquency. Some of the steps which must be done include a written confirmation of persons with the payroll taxes responsibility that the tax deposits are not delinquent.
If you get caught in this process, there is some hope. Before the IRS seizes any money or assets by way of the Trust Fund Recovery Penalty, a company or individual always has the right for a collection due process hearing. In this hearing, you and your tax attorney can defend your case and attempt to offset the heavy sanctions of a Trust Fund Recovery Penalty. This is also where your tax attorney can negotiate for an installment payment plan.