Employment or payroll taxes are a unique tax. The Internal Revenue Service characterizes payroll tax as a ‘trust fund tax’ because the business owner technically holds an employee’s money in “trust” until they make a federal tax deposit for that amount. Since a business owner holds payroll taxes in “trust,” failure to file and failure to pay can result in large penalties and fines.
The Trust Fund Recovery Penalty, or TFRP, was created after a law was passed by the U.S. Congress. The Trust Fund Recovery Penalty encourages business owners to promptly file and pay withheld income and employment taxes.
The TFRP can be assessed without the business stopping their day to day operations. This penalty can be assessed against one person or multiple people related to the business. The TFRP may be assessed against a person who either willfully fails to collect or pay the taxes or the person who is responsible for collecting or paying the taxes. The IRS often uses the term “responsible person” when discussing failure to collect or pay withheld income and employment taxes or collected excise taxes. This term is broad and can be applied to a specific person or a group of people who have the responsibility to collect, account for, and pay these taxes including:
- Officer of a corporation
- Employee of a corporation
- Corporate director
- A corporation or third party payer
- Payroll Service Providers
- Professional Employer Organizations
In order for willfulness to occur, the responsible person should have been aware of any outstanding taxes and either intently did not file or was indifferent to requirements.
If a business has payroll tax problems the IRS will want to interview the employees. This is done to determine the scope of duties and responsibilities of each employee in respect to payroll taxes. An employee will be found responsible if they exercised independent judgment with the finances of this business.
The Trust Fund Recovery Penalty amount is usually a large number. The IRS computes the penalty by adding the unpaid taxes withheld with the employees portion of the taxes due. If an individual is found to be a responsible person, the IRS will mail them a letter stating that the Trust Fund Recovery Penalty is going to be assessed against them. There is a 60 day window in which the individual can appeal. Even before your payroll tax issues escalate to this level, contact an experienced IRS tax lawyer to assist you. Business owners will want this situation resolved as quickly and as early on as possible, especially since the IRS has the power to take collection action against you once the penalty is assessed.
Avoiding the Trust Fund Recovery Penalty can be simple, as long as all employment taxes are collected, filed, and paid for on time. It is important to remember that employment and payroll taxes are not the property of the business owner but of the U.S. government on behalf of your employees, and must be paid.